IRS Audit Awareness Guide
Understanding factors that can potentially draw IRS attention is part of good tax practice. However, IRS audit selection is complex and uses confidential criteria. This guide highlights some common areas that may be reviewed.
Factors That *Can Potentially* Draw Attention
While the IRS does not disclose its specific audit selection methods, certain items on a tax return are sometimes associated with increased scrutiny:
- High Income: Higher income individuals and businesses tend to have a greater chance of audit, regardless of other factors.
- Large or Unusual Deductions/Credits: Deductions or credits that are large relative to income, or appear unusual for your profession or business, may warrant a closer look.
- Business Use of Home Deduction: Requires meeting specific tests (exclusive and regular use as principal place of business, etc.).
- Auto Expense Deductions: Requires detailed mileage logs and documentation.
- Significant Losses, especially from Hobbies: Reporting consistent losses from activities that could be considered hobbies rather than legitimate businesses.
- Cash-Intensive Businesses: Businesses that receive a significant portion of income in cash.
- Foreign Financial Accounts and Assets: Failure to report foreign accounts (FBAR) or specified foreign financial assets (Form 8938) can trigger significant attention and penalties. Large values may also increase review likelihood.
- Complex Investments or Transactions: Investments like private equity, hedge funds, or complex real estate deals.
- Inconsistencies: Significant year-to-year variations in income or deductions, or discrepancies between your return and third-party reporting (e.g., W-2s, 1099s).
- Erroneous Math or Clerical Errors: While often caught by IRS computers, significant errors could potentially lead to further review.
Important Considerations
- Many audits are simply correspondence audits requesting documentation for specific items.
- Even if a factor *can* draw attention, having thorough and accurate documentation is your best defense.
- Cooperation with the IRS during an audit is generally recommended.
Disclaimer: This guide lists *potential* factors sometimes associated with IRS review based on general tax knowledge. It is **NOT** a definitive list of audit triggers and does not guarantee that including or excluding any item will prevent an audit. IRS audit selection criteria are confidential. This tool is for informational purposes only and does not constitute tax or legal advice.
IRS Audit Preparedness Checklist
Good recordkeeping is essential in case of an IRS audit. Use this checklist to track whether you have organized documentation for common areas the IRS might question.
Disclaimer: This checklist is a general guide for organizing documentation. It is **NOT** exhaustive and does not guarantee you have all necessary records for every potential audit situation. It is not a substitute for professional tax or legal advice. Consult with a qualified tax professional for personalized recordkeeping recommendations.