Recently newspapers have been reporting that a study undertaken by the National Taxpayer Advocate shows a greater likelihood of being audited if you are a small business owner and live in certain metropolitan regions. The top five regions identified by the study were Atlanta, Houston, Los Angeles, San Francisco, and Washington D.C. In addition, the study identified businesses in construction or real estate rentals as being considered by the IRS to have a higher likelihood of fudging the numbers on their returns.
The IRS denies using geographic data to influence the
selection of returns for audit. Instead, they score all returns they receive
using a system called the Discriminant Inventory Function or DIF. Higher scores
on the DIF indicate that the IRS has a greater likelihood of collecting larger
sums of money as a result of an audit of the taxpayer. A number of factors are
included in the development of that score and most come from the information
entered on the tax return itself. Certain items cause red flags to be raised
and increase the chances of an audit.
A few items which are considered red flags are: large
charitable contributions, large home office expenses, business or employee
expenses that are out of line with the income being reported and not reporting
all of your income.
The IRS actually only audits about 1% of all of the tax
returns it receives each year so they are looking for returns where they can
collect a significant about of money to justify their efforts. Your best bet to
avoid audits is to keep your return reasonable and have a tax professional
prepare it for you so they can represent you in the event that your return is
selected for an audit.