“How can I avoid being audited?”

Of all the questions we get asked, that question ranks as one of the most common. The answer is simple – given the definition of “audit,” you probably can’t. And while certain deductions do tend to have a higher chance of audit, there truly is such a thing as a random audit – which is probably the most fearful thing for most people.

Generally speaking, though, there are several possible reasons for an audit. In no particular order, they are:

• You reported more than $5.0 million in income. According to the IRS’ Data Book for 2012, nearly 18% of tax returns with $5.0 to $10.0 million of income were audited; 27.37% of returns with more than $10.0 million in income were audited. Compare that with just .64% of those with incomes between $50,000 and $100,000. Basically, as your income goes up, so do your chances of an audit.
• You reported no income. At the other end of the spectrum, people who showed very little to now income also had higher audit rates, though not nearly as high as those at the upper end – 2.67% of those with no income were audited.
• You reported one of the following: self-employment income, unreimbursed employee business expenses or took a home office deduction. These areas are ripe for abuse, and the IRS knows it. Unreimbursed expenses are an especially favorite target, and frequently result in additional tax due. If this section applies to you, make sure you keep good records.
• You reported a large gain or loss. The IRS will frequently check returns with unusually large gains or losses to insure that the taxpayer has correctly reported the income/loss. And yes, if you make a mistake and underreport a loss, the IRS will fix the return in your favor.
• You made a math error, or forgot to report an item of income. Yes, that letter you got from the IRS which caught your math error (common when people did returns by hand, but less likely today) or added in a forgotten item of income is technically what’s known at the IRS as a ‘correspondence audit.’ Another version of this is the letter asking you to provide more detail about a certain item of income. With recent and severe budget cuts at the IRS in recent years, expect more audits like this and fewer in-person audits.
• It’s really just a random audit. It might surprise you but the IRS actually does do random audits. Although these tend to be more infrequent than other types of audits, they do occur, and exist for a variety of reasons – to give IRS agents exposure to a wider variety of returns, to keep taxpayers (at least somewhat) honest, and to insure that the IRS’ systems work properly.

If you have been selected for an IRS audit and do not understand why, contact our office at (818) 480-3280 to set up an appointment. We’re here to help you through this process.