Good Question: What Triggers An IRS Audit?
MINNEAPOLIS (WCCO) - New numbers from the IRS show just 0.86 percent of tax returns are being audited, which is the lowest level since 2004.
In a speech on Tuesday, IRS Commissioner John Koskinen blamed budget cuts. Since 2010, Congress has cut the agency's budget $1.2 billion.
"The math is pretty simple," Koskinen said. "There are fewer audits because we have fewer auditors."
But, even if an audit is rare, it would still be hard to find someone who wants to endure an audit. So, what are the red flags for the IRS? Good Question.
"They have what they call DIF [differential income factor] scores, where they expect certain numbers on your return based on your income," said David Brauer, a CPA with Lurie Besikof Lapidus. "If it differs by a substantial amount, they'll select you for an audit."
The IRS receives copies of all W-2s and 1099s every year. The agency can then match social security numbers from these documents to the individual returns to catch the first big red flag: under-reporting income.
That's how it happened for Marge Holland of Aberdeen, South Dakota, a few years back. When she switched companies, her former employer switched names, so she didn't get the W-2. A letter later came in the mail from the IRS.
"I just went down there and asked them what was going on," Holland said. "They were very helpful."
Brauer says the IRS triggers can change each year, but are generally not random, especially in this era of tight budgets.
"They know what they would expect to recover, and they go after the people they can get the most money from," he said.
He says the IRS will look closely at home office deductions. People are entitled to use part of their home as an office, but it must be set aside for work and not used for other purposes, like a second bedroom.
People with higher incomes are also more likely to be audited. Last year, the IRS audited less than 1 percent of all returns, but the rate jumped to 7.5 percent for people with incomes over $1 million.
Losses from rental activities, disproportionately large amounts of charitable giving and people who are self-employed can also be IRS triggers.
"If it varies from what they expect, they want clarification," Brauer said. "If you're an honest person, you probably don't have anything to worry about."
There is one caveat to that statement. Brauer says you should be sure to keep your receipts so you can prove the information you provided is correct. The IRS recommends keeping records for three to seven years, depending on the action or expense.