How Does the IRS Select You for Audit?
There are many factors involved in the logic used by the IRS when selecting potential audit candidates. From math errors to reporting discrepancies to random selections-it’s best to always be prepared for this possibility. The following is adapted from “Loopholes of the Rich” by Diane Kennedy, CPA.
The IRS makes a series of computer checks on your tax return when it is first received. Each time your return has a problem with one of the checks, you’re running the risk of having an audit. The best way to avoid an audit is to stay under the IRS radar screen during these checks. And, of course, comply by taking only the legal tax loopholes available.
The first computer check is looking for math errors. Don’t assume that there are no math errors on your return simply because a computer program was used to prepare it. Take the time to add up the columns and verify that the totals are properly carried to the appropriate schedules.
The second computer check is looking for unallowable items and verifying third-party-reported information. This is the check that makes sure you’ve calculated your exemptions properly and aren’t exceeding allowable deductions per the form. This is also the time when the IRS will try to match up the wage, interest, dividend, and sales information received from other sources. Look for the IRS to start matching K-1s from partnerships and S corporations as well. They want to make sure that you’re reporting everything that other people have said you should report. And if there’s a discrepancy—guess who gets the audit!
The next check is the one that most people fear. It’s a check performed by the Questionable Items Program and this is the one that can cause a full-blown audit. Some of the audits are selected completely at random and some are called because the return simply doesn’t fit the normal criteria.
If you have a business, the IRS will check your reported deductions against other businesses of your type. It will use the principal business code that you’ve reported for determining what types of businesses are like yours.
Avoid IRS Red Flags
- File on time (or with timely extension).
- Be thorough.
- Be neat.
- Be sure math is correct.
- Be consistent.
- Fill in all blanks that should be filled in.
- Balance out deductions to reasonable amount compared to income.
- Sign your return.
- Mail return receipt requested.
Good Records
The law requires that you keep good records so that you can prepare complete and accurate tax returns. You must be able to substantiate items of income, deductions, and credits.
Prepare
The single answer for how to reduce risk from IRS audit is to properly prepare for the audit. With good, neat, and easily accessible records, the concern will be reduced. If keeping good records is not your strongest suit, then turn that function over to a competent bookkeeper. Bookkeepers are trained in how to keep track of documentation. Follow their lead!
There are many factors involved in the logic used by the IRS when selecting potential audit candidates. From math errors to reporting discrepancies to random selections-it’s best to always be prepared for this possibility. The following is adapted from “Loopholes of the Rich” by Diane Kennedy, CPA.
The IRS makes a series of computer checks on your tax return when it is first received. Each time your return has a problem with one of the checks, you’re running the risk of having an audit. The best way to avoid an audit is to stay under the IRS radar screen during these checks. And, of course, comply by taking only the legal tax loopholes available.
The first computer check is looking for math errors. Don’t assume that there are no math errors on your return simply because a computer program was used to prepare it. Take the time to add up the columns and verify that the totals are properly carried to the appropriate schedules.
The second computer check is looking for unallowable items and verifying third-party-reported information. This is the check that makes sure you’ve calculated your exemptions properly and aren’t exceeding allowable deductions per the form. This is also the time when the IRS will try to match up the wage, interest, dividend, and sales information received from other sources. Look for the IRS to start matching K-1s from partnerships and S corporations as well. They want to make sure that you’re reporting everything that other people have said you should report. And if there’s a discrepancy—guess who gets the audit!
The next check is the one that most people fear. It’s a check performed by the Questionable Items Program and this is the one that can cause a full-blown audit. Some of the audits are selected completely at random and some are called because the return simply doesn’t fit the normal criteria.
If you have a business, the IRS will check your reported deductions against other businesses of your type. It will use the principal business code that you’ve reported for determining what types of businesses are like yours.
Avoid IRS Red Flags
- File on time (or with timely extension).
- Be thorough.
- Be neat.
- Be sure math is correct.
- Be consistent.
- Fill in all blanks that should be filled in.
- Balance out deductions to reasonable amount compared to income.
- Sign your return.
- Mail return receipt requested.
Good Records
The law requires that you keep good records so that you can prepare complete and accurate tax returns. You must be able to substantiate items of income, deductions, and credits.
Prepare
The single answer for how to reduce risk from IRS audit is to properly prepare for the audit. With good, neat, and easily accessible records, the concern will be reduced. If keeping good records is not your strongest suit, then turn that function over to a competent bookkeeper. Bookkeepers are trained in how to keep track of documentation. Follow their lead!