Audit Triggers - Know what the IRS is looking for...

With the tax clock ticking down lots of people are finishing up their tax returns. A common question that comes up during this joyous time of year is, “How can I avoid an audit?” Fortunately for most taxpayers the question is far more common than an actual audit. Only around 1% of all taxpayers actually end up facing an audit.

Comforting as that fact is, it is in no way instructive. Knowing what is more likely to trigger an audit can go a long way to avoiding one. Avoiding these triggers will not guarantee that an audit will not occur but it will reduce the chances of one. While all of the reasons that the IRS launches an audit aren’t known, crunching the statistics of past audits does demonstrate some clear triggers.

High deductions – Any deduction that is proportionally high to the taxpayer’s income usually constitutes a red flag. Determining what’s high is the trick here. The IRS publishes an annual book, “Statistics of Income.” Although the book gives ranges for typical incomes some logic needs to be applied. If a taxpayer is at the lower end of a particular income range but claims the upper limits of deductions associated with that range then that deduction may still trigger an audit review even though the deduction is technically within the accepted limit.

Cash Income – Any profession that deals with a lot of cash, such as waiting tables, tends to spark the curiosity of IRS audit agents. One of the first things they compare in cases such as this is bank deposits vs. claimed income.

These are a couple of common triggers that can set off an audit. Tomorrow I'll share another couple of potential red flags. Remember, avoiding these doesn't necessarily guarantee avoidance of an audit but it can certainly reduce the possibility of one.