Do know someone who has received a notice from the Internal Revenue Service (IRS) about an impending audit? Have you been so unfortunate as to receive one? If so, you may be wondering how the IRS decides which tax returns to audit. Is it random? Is there a complicated algorithm they use to decide? Or, are there certain red flags that IRS agents look for when they process tax returns?
While the odds of receiving an audit notification tend to be low, there are things that might be on your tax return that could trigger one of those dreaded IRS notifications. To find out some tax items that the IRS usually considers to be red flags, read further.
Your AGI is over $1 million
If your adjusted gross income (AGI) exceeds one million dollars, you have a higher chance of an IRS audit. This does not mean you should start earning less, but instead you should take extra care with the preparation of your return. This might mean hiring a Certified Public Accountant (CPA) with enough experience to correctly prepare your tax return.
Your charitable contributions are unusually high
Donating to charity has its perks. Not only are you helping out a good cause, but you can claim a deduction on Schedule A of your personal tax return. However, if the charitable contribution deduction you are claiming is unusually high when you compare it to your total income, then IRS might request documentation to verify that you did, in fact, make those donations. Most charitable organizations will provide you with a year-end giving statement or a receipt at the time of your donation that you can keep as proof. If you plan on making any significant non-cash donations, such as a car or other high-value property, you should first consult with a CPA to ensure the item is properly appraised and you have the correct paperwork to support the donation.
You left out income
If you receive W-2s for Form 1099s for work that you perform, keep in mind that the IRS receives copies of these. In addition, the IRS will also have knowledge of any 1099-Int, 1099-Div, or 1099-B tax statements that you receive. These documents include amounts you earn as interest, dividends, and from stock sales. Failure to report the full amount of income you receive, as stated on these forms, could also trigger an audit.
You claimed losses on rental properties
The tax rules surrounding rental property activity can be complicated. Furthermore, the rules are very strict when it comes to claiming a loss on rental property. For example, you either have to actively participate in renting the property or you have to be a real estate professional. If you have rental property, it is best to seek the help of a tax professional in reporting the activity instead trying to do it yourself.
By avoiding the above red flags, you stand a higher chance of avoiding an audit. However, if you fall into any of the categories, such as income over $1 million or high charitable contributions, it is vital that you keep very detailed and complete records of the items that you include on your return. Having these records readily available will help when it comes time to find audit representation.