Red Flags for Tax Auditors
Here are six flags that may make your tax return prime for an IRS audit.1
Only about 0.4% of all individual taxpayer returns were audited in 2019, which is the most recent data available. However, the percent of audits rose to 1% for those with incomes between $200,000 and $1,000,000 and to 2.4% for those making over $1 million.2
The Chance of an Audit Rises with Income
The IRS has a scoring system it calls the Discriminant Information Function that is based on the deduction, credit, and exemption norms for taxpayers in each of the income brackets. The IRS does not disclose its formula for identifying aberrations that trigger an audit, but it helps if your return is within the range of others of similar income.
Deviations from the Mean
Taxpayers who repeatedly report business losses increase their audit risk. In order for the IRS not to consider your business as a hobby, it needs to have earned a profit in three of the last five years.2
When a Business is Really a Hobby
The IRS receives income information from employers and financial institutions. Individuals who overlook reported income are easily identified and may provoke greater scrutiny.
Non-Reporting of Income
When divorced spouses prepare individual tax returns, the IRS compares the separate submissions to identify instances where alimony payments are reported on one return but alimony income goes unreported on the contra party's return.
Discrepancies Between Exes
Passive loss rules prevent deductions of losses on rental real estate, except in the event when an individual is actively participating in the property's management (deduction is limited and phased out) or with real estate professionals who devote greater than 50 percent of their working hours and over 750 hours per year to this activity. This is a deduction to which the IRS pays keen attention.2
Claiming Rental Losses
1.The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation
2. Kiplinger.com, 2021
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.