Audit Red Flags

Filed in archive Taxes on April 9, 2007

Jennifer Openshaw had an interesting article on TheStreet last week about things the IRS looks for in deciding to audit certain tax returns. Too late to do much if you've already filed, but if you haven't (or if you want to prepare for next year), here are the points:

1. The IRS looks to see if your reported income seems comparable to others in your field and your geographic area. If you appear to make significantly less, they might come looking for you.

2. If your deductions are more than 45% of your income, the IRS figures you're deducting too much or reporting too little income.

3. Like #1 above, if single deductions look out of whack, they could come after you. Charitable contributions, especially non-cash contributions for large amounts, could cause the IRS to raise an eyebrow.

4. Round numbers could make it look like you're giving top-of-the-head estimates on deductions instead of provable deductions with records to back them up. So you might want to change $1500 to $1493.

As the article says, it's all very secret, so maybe only three or four people in the whole country really know the formula (wouldn't it be fun to be one of them? Such power!), but these guidelines might help.