Thursday, April 25, 2013

Audits By Geographic Area

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.

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