Tax Audit Triggers To Watch Out For

Armen Hareyan's picture
Advertisement

Tax Audit

The mere thought of an Internal Revenue Service (IRS) tax audit can send chills down the spine of even the most conscientious taxpayer. While there is no way to guarantee you won't get audited by the IRS, you can lower your chances. Read what the Colorado Society of CPAs says about several common tax audit triggers.

UNDERSTANDING DIF

The IRS identifies returns warranting a closer look by using a computer program that compares a taxpayer's deductions to others in the same income bracket. The program is called DIF, which stands for "discriminate index function." The DIF gives each tax return a computer-generated score indicating the likelihood of questionable items.

Advertisement

For example, if IRS statistical data shows that the average person in your income tax bracket claims $500 in charitable donations, and you claim $5,000, the DIF is likely to flag your return. The more your return deviates from the norm, the higher your score and the more likely you will be audited.

UNREPORTED INCOME

One of the most important steps you can take to avoid an audit is to report all of your income. IRS computers match the taxable income reported on a taxpayer's return with the information it receives from employers and from 1099 forms issued by banks and brokerage firms. To help ensure you don't miss reporting any taxable income, compare the reported income on your 2004 return with the previous year's return. Additionally, be sure you have correctly recorded all income from all 1099 forms.

BUSINESS EXPENSES AND THE HOME OFFICE DEDUCTION

Being in business can trigger an audit, especially if you are

Advertisement