What Triggers a Tax Audit?


Authored by Jayant Row in Taxes
Published on 05-06-2009

A tax audit by the IRS is what most Americans fear as much as they do going to the dentist. In fact, only about one in hundred of the tax payer population has to undergo such an audit. Considering the statistics it is highly unlikely that you could be called for such a tax audit. While this is a comforting thought it does not mean that you can be lax about filing your tax returns. There are certain reasons why tax audits are undertaken, and if you steer clear of these, you can ensure that you do not trigger a tax audit.

One of the reasons that invariably trigger off a tax audit is the percentage of deductions. Some tax payers who are at the lower end of the income ranges claim deductions that are more suitable to the higher end of that income range. While technically this can be allowable, the mismatch between income and deduction will trigger off a tax audit. So make sure that the deductions you claim are more suitable to the income that you are declaring.

People who declare high incomes are more likely to be liable for a tax audit than people who declare modest incomes. Taxpayers having income of less than $100,000 are ten times less liable to tax audit compared to persons declaring an income of over a million dollars.

If your income consists of a lot of cash, this does invite the curiosity of the IRS. They will compare bank deposits and the income you have declared and see whether it matches your lifestyle. People can always get past this hurdle by not banking the cash, but this can cause a few security problems.

People who are self employed have a tendency to declare all sorts of expenses in order to keep their bottom lines at the level they want. Such expenses do invite the scrutiny of the IRS and can trigger a tax audit if the expenses sheets are very aggressive.

It is no certainty that taking care of these aspects will help you to avoid a tax audit. The best way to face up to an audit is to be always prepared for one. See that the deductions you claim are legitimate and reasonable. See that all your records and receipts are well maintained. They should be able to stand any scrutiny and thus any problems that a tax audit can cause you.

Most audits are triggered by mistakes made while the return are being filed, and the IRS will always allow you to correct these mistakes if they are proved to be such. So to avoid that audit, check and double check the figures on your IRS forms. See that every figure you have included is fully backed up by documents in your possession. Keep your records accordingly so that even if there is an audit, you are able to fully justify the amounts on your returns. If you have any doubt about some of the deductions you are claiming, it will be prudent to just forgo that amount. Sending the concerned receipt along with your return in case you feel the deduction can be questioned is a sure way of avoiding the tax audit.

Quite often audits are also the result of random selection by the IRS, and you may still have to face the audit even though you have been absolutely scrupulous in filing your returns. So if it does happen, just face up to it.


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