Another item that increases the chances of Internal Revenue Service scrutiny are large changes in deductions from year to year.  For example if you claim $100,000 in charitable contributions one year, the next year, zero, and the next you you once again claim $100,000. 

Mike Sylvester, CPA/ABV

Another item that increases you chances of IRS audit is a return that shows far more expenses than income.  This shows that you spent more than you made and often makes the IRS wonder where that money came from.  If your itemized deductions (Mortgage interest, charitable contributions, medical expenses, and the like) far exceed your reported income your chances of IRS audit have increased.

If you have correctly reported your income and if your deductions are legitimate and documented then you should certainly take them; however, be aware your chances of IRS scrutiny have increased.

Mike Sylvester, CPA/ABV

The Internal Revenue Service (IRS) has developed a “secret” set of “normal” parameters for taxpayers in different categories.  If too many of the parameters they monitor fall outside of the “normal” parameters for a given tax payer then that taxpayer is more likely to get audited.

This is best shown with an example:

Lets say the IRS groups people who are married and file joint tax returns together.  Lets say they group those who report gross incomes of $50,000 - $70,000 into one category.  Lets further say that the IRS has determined that it is “normal” for those taxpayers to have $11,000 - $17,000 in itemized deductions.  If a married taxpayer in this income range has $19,000 in itemized deductions than the IRS would consider this parameter outside of the “normal” range and this item would be counted by the S as being outside of the “normal” range.  If a taxpayer gets enough items outside of the “normal” range than an IRS audit may be triggered.

This “secret” formula is handled by the IRS computer system and is checked automatically by the IRS computer system.

Mike Sylvester, CPA/ABV

You are more likely to be audited by the Internal Revenue Service if you repeatedly claim small business losses on your tax return.  This is especially true if you operate either a sole proprietorship or a single member LLC for which you file a schedule C with your personal tax return each year.  These schedule C businesses are more likely to be audited if they do not show a profit for at least three of the last five years.  If these schedule C businesses do not show a profit the Internal Revenue Service may feel that these are hobbies rather than businesses!

Mike Sylvester, CPA/ABV

This is the second post discussing situations that increase your chances of incurring an audit from the Internal Revenue Service.

Certain expenses listed on your tax return are more likely to draw the attention of the Internal Revenue Service. 

Meals and entertainment expenses are often scrutinized by the IRS since they are commonly abused by certain taxpayers. 

Automobile and travel expenses also increase the chances that you will be audited by the Internal Revenue Service.

I strongly feel that you should deduct the above expenses; however, you need to ensure that the expenses are valid deductions and you need to keep the required documentation.

Internal Revenue Publication 463 is a good source of information regarding these expenses and can be retrieved at:

http://www.irs.gov/pub/irs-pdf/p463.pdf

Mike Sylvester, CPA/ABV