Three triggers that increase the risk of a tax audit

| Mar 18, 2020 | Tax Audits

When you look at the numbers, it appears your risk of getting a tax audit are relatively low. In fact, with the reported average rate of federal tax audits in 2019 being 0.45%, you may think your odds of avoiding scrutiny are pretty good. In many cases this is true, in others, certain taxpayers will get a closer look.

What can trigger this level of scrutiny? The following triggers are some examples.

Red flag #1: High income.

For starters, the IRS is much more likely to conduct an official audit for taxpayers that make more money. Those who report $1 to $5 million in income have 2.21% chance of an audit. This may seem like a small number, but it is significantly higher than the average rate of an audit, which was 0.45% in 2019. The odds jump even higher for taxpayers who report $10 million or more. At this level of income, the odds of an audit are 6.66%.

Red flag #2: Questionable income

If you received a tax form, odds are high the IRS did as well. This means anyone that takes part in an online platform like VRBO or Etsy and receives a 1099-MISC or 1099-K from the platform should be aware of the fact the platform likely sent the same form to the IRS. As a result, the IRS will likely notice if you fail to report the income.

Red flag #3: Earned income tax credit

This credit can trigger a closer review because it is refundable. This means that taxpayers who claim the earned income tax credit could receive a refund even without paying taxes.

These red flags paired up with the agency’s use of automated software to help flag tax returns that warrant additional scrutiny could increase the risk that anyone who has a questionable return will face an audit. As a result, if you receive notification of an audit there could be a high likelihood that the IRS believes the investigation will go in their favor. As such, it is wise to seek legal counsel to better ensure your interests are protected. The attorneys at Goldburd McCone are familiar with this process and can provide counsel to better ensure a more favorable outcome.