Biggest Tax Audit Triggers

NEW YORK (MainStreet) — You walk out to the mailbox to find a letter from the IRS. Hair raises on the back of your neck in dread:is this an audit?

Probably not. In fact, less than 1% of tax returns are audited by the IRS every year. Most of those are handled with what is called a "desk audit." This is when the IRS contacts you requesting more information, or to square away a discrepancy between their records and yours.

All returns aren't created equally, however: some are more likely to trigger an audit than others. If you want to avoid the full-cavity search of an all-out IRS audit, here's what to avoid.

Inaccuracies

It might sound obvious, but it's one of the most common ways that a desk audit gets triggered: not having accurate information on your return. "If your W2 or 1099 or 1098 doesn't match your return, that's going to trigger a desk audit," says Leif Novie, a principal in the tax and accounting department at MBAF.

Deductions Problems

Mike Campbell, a tax partner in the private client services group at BDO, urges people to take every deduction that they're legally entitled to. "People shouldn't skip deductions, because they're afraid it will trigger an audit," he said. At the same time, he acknowledges that inaccurate deductions are one of the biggest reasons for an audit. "Incorrect information is the hardest to defend at an audit," he explains.

"Sometimes people just put deductions in the wrong place," he says, which can trigger a desk audit. Problems arise when people are inappropriately claiming deductions. "Don't claim a loss on a Schedule C business that's actually a hobby," he says.

He also points out that the IRS has a number of tables that determine how much of a deduction is too much for different income brackets. A closely guarded secret, no one really knows what qualifies as "too much." "Homeowner interest deduction is a common audit trigger," he says. "If it's too high relative to your income, that can trigger an audit."

More on the Schedule C

Don't ever claim that a hobby is a business and claim a loss. To do so is to invite an audit, says Novie. "Declaring a loss year after year is another way to get audited," he says. "If there's no profit in five out of five years, the presumption that you're actually running a business is going to start moving against you."

This is such an audit trigger that Novie has advised clients to pass on expense items for the sake of showing a profit. "We pass on deductions that are smaller if we need to show a profit," Novie says.

Foreign Accounts

"Foreign accounts have been a huge trigger lately," he says. The reason being, there's more information about the accounts available to the IRS than in years past. "Some of these institutions are either required or under great pressure from the IRS to provide information about foreign accounts," Novie says.

At the very least, the IRS knows who has accounts. If you're not reporting having anything in them, that's going to raise suspicion and probably trigger an audit.

Tax Preparers

An audit might not be triggered by anything that you did, but by a tax preparer who has a long history with the IRS. Novie explains that there are tax preparers who are known as shady characters by the IRS. "Just seeing their signature on your return can trigger an audit," he says. He advises people to do their due diligence before hiring a tax preparer, something that's easier than ever in this age of Yelp and Google reviews.

"Very few returns get audited in the grand scheme of things," says Campbell. What's more, if you're 100% honest and truthful, and have a good tax preparer, you have nothing to worry about even if you're audited. "Your tax return is a report of what occurred last year," he explains. "Filing your taxes is just a simple process of reporting what happened."

--Written by Nicholas Pell for MainStreet

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