Are You an Audit Target?

Oct 14, 2014

Each year there are individuals who are targeted for IRS audits based on minor decisions they may have made during the year. One goal during tax season, besides being on time, should be to completely avoid the IRS in an ethical manner. There are multiple ways that individuals may intentionally or unintentionally raise red flags, which makes them susceptible to an IRS audit. While there are a number actions that may call for an IRS audit, here are some of the more common red flags:

auditCharitable donations. Who would have thought being generous could land you in hot water? The truth is, usually, it won’t. However, people who are audited in regards to charitable donations are the ones who over exaggerate the value of their donations, generally when dealing with non-cash items. Avoid the headache of dealing with the IRS and be realistic when it comes to pricing your donations. Also, remember to keep all of your charity receipts just to be safe.

Reported income. Failing to report income seems like an obvious red flag to most people, but you would be surprised to find out how many people honestly forget to report certain income. If you are an individual with multiple brokerage statements, it may be a good idea to create a checklist to keep on hand, ensuring each form of income is reported. Being organized will keep you safe and less stressed come tax time.

Being a millionaire. While the red flags associated with charitable donations and reporting income are ones that you may be able to avoid, there is one red flag that may be waving regardless of your action. Once you become a millionaire, your chance of being audited increases exponentially. While the current audit rate is at 1% on average, the rate climbs all the way up to 9% if you make $1 million. Just to give you an idea of how much the risk of being audited grows in relation to what you earn, people who bring in more than $10 million have a 27% percent chance of an audit. Let’s hope these individuals are reporting all of their income as well, because this percent does not have a limit!

Overall, there are some red flags that individuals will be able to avoid and some that should be expected. The goal should be to eliminate as many red flags as possible while being remaining. Make sure you keep donation receipts, record realistic values on donations and report all of your income. Hopefully, you will be on your way to a headache free tax season!

By: Jason Wenner, Staff Accountant

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