Dec 1, 2007

IRS Debt- the Audit: What are chances of selection?

The IRS announces each year what they are going to be looking for in their annual “Dirty Dozen” report. They also make the audit statistics available in order to see that they are auditing taxpayer’s returns.

The following are the top five red flags for audits. They include:

Location. Where you live makes a difference in determining whether you are more at risk from an audit. You are more likely to get an audit if you live in one of these places:

Los Angeles, North Central District (ND, SD, MN), Southern California, Northern California, Manhattan, Central California, Brooklyn, Southwest (AZ, NV, NM), South Florida and Houston.

How Much You Make. This statistic is fascinating. It would seem to make sense that the IRS is more likely to audit people who make more money. But, the fact is that they are actually more likely to audit people who make LESS money. In fact, the most likely return to be audited is a return that includes a business that makes less than $25,000 per year. If you do not have a business, you have the most chance for an audit if you file a Form 1040A and make less than $25,000 per year. Business Entities. If you have a business, you are much more likely to be audited if you operate in a Sole proprietorship, Schedule C. In fact, you are ten times more likely to be audited as a Sole Proprietorship than if you are an S Corporation or C Corporation. Why? That is because most Sole Proprietorships do not have great recordkeeping systems and the IRS knows that.

Under-reporting Income. the IRS receives copies of your K-1s form Limited Partnerships and S Corporation, 1099s from interest, dividends and sales, and W-2s. If you do not report these items on your return, or you report a different amount, your return will get pulled for inquiry.

Who Files Your Return Matters. If you have a complex return and prepared it yourself or if your return was prepared by someone on the IRS’s problem preparer list, you are more likely to be audited.”

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