This question is asked on a regular basis. The answer to the question, of course, varies based on the circumstances of each individual tax return. But, in general, you have about a 1-in-104 chance of your tax return being selected for audit. Before you start worrying about that statistic, you can adjust the probability to approximately 1-in-250 if your tax return does not include income from a business, rental real estate or a farm, or write-offs of unreimbursed employee business expenses.
On a positive note, many IRS audits actually result in a refund for the taxpayer under audit. According to Kiplinger.com, approximately 40,000 audits during 2013 resulted in refunds totaling $950 million, and in addition, approximately 9% of audits during 2013 resulted in no change from the original return filed.
But how are returns selected for review? In addition to obvious reasons (W2’s or 1099’s not reported or not matching those filed), the IRS also analyzes all the data in the more than 140 million tax returns it receives with a computer software program called the Discriminate Information Function System (DIF), which gives each return a ‘score’ that is an estimated calculation for the potential for change in tax due. Another ‘score’ is also calculated which indicates the potential for unreported income based on the return data analyzed. The higher the score in these tests, the more likely your tax return will be reviewed. Some returns are selected at random to help “calibrate” the computer software, while some others may be selected because they have been connected to other returns that are under audit.
What else can increase your odds for audit? Income over $200k alone is said to increases your odds to about 1-in-30 according to Kiplinger. Other “red flag” type circumstances increasing audit odds are disproportionately large charitable contributions to income, noncash donations over $500 without form 8283, claiming day-trading losses on Schedule C, rental real estate losses, claiming 100% business use of a vehicle, writing off losses for hobby activities, claiming a home office deduction, taking an alimony deduction, failing to report a foreign bank account, and taking higher than average deductions.
In the end, having documentation for all your deductions is critical- and having your return prepared by a reputable firm that will competently represent you in the event of an IRS audit, such as Paresky Flitt & Company, will certainly help mitigate your worries.
Written by Scott Gallagher