The IRS audit is every taxpayer’s fear, even those who are honest and diligent. However, IRS audits are less common than many Americans believe. The likelihood of an audit does tend to increase with a taxpayer’s income. Those earning under $200,000 per year have a .76% chance of being audited; taxpayers earning over $1 million annually have a 9.5% chance of being audited.
This is partially due to the fact that the IRS doesn’t have the manpower to cast a wider net. A recent CNBC.com article reports that the IRS budget dropped $900 million dollars from 2010 to 2015, resulting in a 23% workforce reduction.
What steps can you take to reduce your risk of an IRS audit? The first step is to keep careful records of everything. If you do happen to be audited, those detailed records will make the whole process a little less painful.
It should go without stating, but make sure you report all your income, including self-employment and side projects. If you get a 1099, the IRS will want to see that you have reported that income. Let your CPA know if you have any overseas holdings, as there are special forms that must be filed for those assets.
Donations can raise red flags with the IRS. Taxpayers should not be discouraged from being charitable, but be certain you have thoroughly documented any large donations. You will need to file a Form 8283 for non-cash donations of $500 or more.
If you have any tax questions, our CPAs are happy to help. To read more, see the article from CNBC.com.