The IRS often audits returns for the following reasons:
- Unreported Income - The IRS matches the W-2s and 1099s (Interest, Sale of securities, Dividends, and Miscellaneous Income). Taxpayers are generally contacted if they have not reported a 1099 or W-2.
- Travel and entertainment deductions - The Intemal Revenue Code requires who, what, where, when and why of all travel, meals and entertainment. The IRS wants to see the hotel bill not just the credit card receipt. This is a prime audit target.
- Large charitable gifts - Can be suspicious if disproportionate to your income.
- Home-office deductions - Deductions are often claimed by taxpayers who do some work at home but don’t qualify for a home office.
- Cash businesses - The IRS is more likely to audit returns of businesses dealing in cash.
- Hobby losses - enerally, only losses Hom a bona lide business are deductible.
- Foreign bank accounts - The IRS is pursuing Lmreported income from offshore accounts.
What are your chances of an IRS Audit?
According to figures recently released by the IRS, approximately 1.11% of all 2010 individual tax returns were audited in 2011, the same as in 2009. The rate has hovered around 1% for several years.
The IRS audit rate is 1.02% for taxpayers with income of less than $100,000. For those with income of $200,000 or more the audit rate increased to 3.93%. or roughly one out of every 25 returns. Audits jumped to about one out of eight for income above $1 million.
Your responsibility to prove
The responsibility to prove (substantiate) income, deductions, and statements made on your tax returns is known as the "burden of proof." Records such as receipts, canceled checks, and other documents that support an item of income, a deduction, or a credit must be kept, but you may choose any record keeping system that clearly shows your income and expenses.