At this time of year, taxpayers in California and around the country are hoping to avoid the dreaded tax audit letter. The good news is that the Internal Revenue Service only audits a small percentage of the overall population--currently about 1 percent. The bad news is that audit rates are much higher among certain groups of taxpayers, whose returns single them out for additional IRS scrutiny.
There are many reasons why a person may be more likely to receive a tax audit. The most obvious one is not following the rules. Failing to file a return in a timely fashion suggests that a person may be attempting to evade taxes. Such people will get extra attention from the IRS, which has penalties in place for people who file late. Taxpayers who also do not fill out forms correctly are likely to catch the IRS's watchful gaze.
Taxpayers are also audited in greater numbers based on what they claim on their returns. For example, the IRS is more likely to scrutinize the returns of those who claim a high amount of charitable deductions to make sure that the deductions are truthful and accurate. In addition, taxpayers who claim a home office deduction stand at a greater risk to receive an audit. The rules for claiming the deduction are quite narrow and specific. Many ineligible people improperly take the deduction, so their returns may see a higher level of examination.
Other audits come about because of what a person has. Small business owners are often audited because they have the chance to underreport income. Wealthy taxpayers with offshore accounts and foreign assets are increasingly becoming the targets of audits because the IRS suspects that they are sheltering income from taxation. The IRS has instituted new rigorous reporting requirements for those with assets overseas.
Taxpayers who are honest, accurate and document everything copiously will be in a good position if they are audited. But it can take more than detailed records to satisfy the IRS. An experienced tax attorney can provide assistance to those under the IRS's microscope.
Source: CNNMoney.com, "11 tax audit red flags," Blake Ellis, Mar. 28, 2012.