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A few common reasons that a tax audit occurs

One of the common myths about a tax audit is that some tall, ominous-looking man in a black suit — complete with shades and a hat — will come knocking at your door, asking you inquisitive financial questions. That may be the great fear, but it is hardly grounded in reality. Yes, some audits require a personal touch, and the Internal Revenue Service may need to talk with you face-to-face. But usually audits are done through letters, emails and phone calls.

Navigating all of this communication can be confusing, and it behooves someone who is being audited to consult an attorney with experience in tax law. But what about those who are filing their taxes now? Should they be concerned that they are going to be audited?

For the most part, the answer is “no.” Most tax returns are not audited. However, that doesn’t mean you should just go off and lie on your tax returns. At the same time, there are certain aspects to your tax return that could trigger a audit:

  • Income: this one is obvious, but the higher your income is, the more likely it is that you will be audited. This is especially true once your income reaches the $200,000 threshold, and it’s even more likely at the $1 million threshold.
  • Deductions and charitable donations: both of these elements can cause the IRS to take a closer look at your taxes. This doesn’t mean you should avoid donating to charities or deducting things from your taxes. But it is a reminder to stay organized and to substantiate your deductions and donations.
  • Owning a business or extra real estate: again, like the income bullet point, this one is fairly obvious. The IRS will want to ensure you are not using your business to make shady deals or dodge taxes; and added real estate can make you a target.

Source: InvestmentNews, “Warning signs you’re at risk of an audit,” Darla Mercado, Feb. 19, 2014