Much to many taxpayer’s surprise, all tax returns submitted to the Internal Revenue Service undergo a computerized statistical analysis to determine if an audit will be necessary. Known as Discriminate Function, the analysis looks at the likelihood of a return having an under-reported income, over-reported deductions, and various other factors. Of all the tax returns audited each year, 75 percent of them come about due to receiving a poor DIF score. As for the other 25 percent, they are targeted based on information received by the IRS from outside sources, such as public records or tips. Whatever the case may be, an audit is the last thing any taxpayer wants to experience. To learn more about this, here are some common reasons why the IRS is likely to conduct a tax audit.
If you have been audited in the past, chances are it will happen again at some point. This is especially true if the previous audit resulted in a tax deficiency, meaning you wound up owing money to the IRS.
Disproportionate Deductions and Income
If you chose to itemize deductions on your tax return, you may be more likely to experience an audit. For example, if you have itemized deductions on your return that are disproportionate to your income, that is usually a red flag to IRS personnel.
While there is certainly nothing wrong with claiming charitable donations on your tax return, just be sure they are as accurate as possible. In many cases where an audit occurs, a person has claimed large charitable donations that are not reasonable based on their reported income.
Offshore Bank Accounts
If your tax return shows you did a large amount of business with offshore banks, businesses, or investment firms, your chances of being audited soar. Due to the many complex and sometimes illegal activities associated with offshore finances, the IRS takes a close look at any taxpayer using offshore credit cards, bank accounts, or investments.
If you are divorced, make sure you accurately report any alimony being paid or received. In these situations, the IRS often matches up the alimony deducted by one spouse with the income reported by the other spouse. If the numbers don’t match up, an audit is likely to happen.
While the above-mentioned reasons are very common ones as to why the IRS conducts audits, they often pale in comparison to those brought about by disgruntled employees, business partners, or others who want to see another person punished for cheating on their taxes. While in some cases the information given by informants turns out to be incorrect, many are in fact very accurate with their reports.
While overall the number of tax returns that are audited is still quite small, it does nevertheless happen to many people who never expect it will happen to them. Because of this, while it may be tempting to cheat here and there, always try to be as accurate as possible on your tax return.
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