AVOIDING AN IRS AUDIT
I’m an honest taxpayer, but I’ve heard that the IRS is increasing the number of audits the agency will perform this year. What is the IRS looking for?
Most returns are selected for audits by an IRS computer-generated program that compares the deductions you are claiming on your return to other returns in your income bracket. To arrive at a discriminate function (DIF) score, the formula also considers where you live, the size of your family, and how your income is earned. For example, if you were to report income of $60,000, live in an exclusive neighborhood with your family of six, and claim $15,000 in mortgage interest, the IRS may want to chat with you.
How you generate your income may increase the likelihood of your return being selected for an audit. For example, your chances rise sharply if you file Schedule C. That’s because the IRS is well aware that self-employed workers have more opportunities to hide income and to transform personal expenses into business deductions. Workers who receive much of their income in cash, such as those in the gaming, food service, and entertainment industries, also can expect a higher level of scrutiny.
In recent years, the IRS has enhanced its document-matching program, which compares the information sent to the IRS by taxpayers’ employers, clients, and financial services providers to what’s reported on the return. To avoid attracting the attention of IRS auditors, make sure the numbers you report accurately match the information the IRS receives. Check your W-2 wage statements and Form 1099s as soon as you receive them and, if the information is incorrect, ask the issuer to send revised forms to both you and the IRS.
Be sure you record the correct Social Security numbers for yourself, your spouse, and your dependents. The government uses Social Security numbers to check whether a child is claimed as a dependent by more than one person. It’s also important that you review the Social Security numbers on your W-2 forms. According to the IRS, an incorrect number on a Form W-2 results in the return being categorized as “not processible.” In such cases, a refund is delayed until the IRS obtains the correct Social Security number.
Verifying the accuracy of the math on your return is one of the easiest ways to escape a second look by the IRS.
Be careful about claiming deductions for donations not in line with your income. If you report income of $50,000 and donate $10,000, you may be doing a noble thing, but the IRS is likely to want to know more. In such a case, you may want to include support documentation with your tax return.
Although the rules governing who can qualify for the home office deduction were relaxed in 1999, they are still complex and apply to only a limited number of employees. While you certainly should claim the home-based office deduction if you operate your business from your home and meet all the requirements, be aware that this might invite IRS scrutiny. Read carefully IRS Publication 587, Business Use of Your Home, before deducting expenses associated with a home office.
IRS Audit
