Under the current Internal Revenue Service (IRS) system, few taxpayers are completely safe from being audited, but over 99% manage to fly under the IRS radar every year. Of the very small percentage who do end up getting audited, most are engaged in high-risk or high-income occupations or are self-employed with significant business deductions listed on their returns. Others are either randomly selected for quality control purposes or because they entered information which raised flags according to a secret IRS formula. Your chances of getting audited as an average citizen paying an average amount of federal taxes are still pretty minimal, at least in theory.
One thing you can do to avoid getting audited is avoid cash-intensive occupations, such as auto repair, waiting tables, gaming, professional entertaining and anything in the hospitality trades. Taxpayers who receive significant amounts of cash tips or gratuities are obligated to report this income to the IRS, but in reality many people under-report cash income on their tax forms and pocket the rest. If you work in an industry where cash payments and tips are part of your income, you should keep accurate records and report this income to avoid being audited. If a bartender working in Las Vegas, Nevada, for example, only reports $12,000 US Dollars (USD) of income on his taxes, the IRS may wonder if he is under-reporting his income from tips.
Another way to avoid getting audited is to double-check your math before submitting your tax return. The IRS computer system can correct minor errors, but a tax return filled with numerous mathematical errors is going to attract unwanted attention, especially if those errors routinely favor the taxpayer. Mistakes in personal information such as addresses or social security numbers can also increase your chances of being audited. Your goal is to make your own tax return look as inconspicuous as the rest of the forms sitting on an IRS agent’s desk. Electronically filed returns are supposed to be included in the “audit lottery,” but often it’s a case of out of sight, out of mind.
The IRS tends to audit taxpayers with a greater opportunity to under-report income or to claim unauthorized business expenses. This is why an inordinate number of taxpayers being audited are either self-employed or involved in businesses the IRS considers ripe for financial abuse. Self-employed people must withhold enough money every year to meet their tax obligations, but they are also entitled to claim a number of legal business expenses to offset those obligations. The IRS is aware of the temptation to report personal expenses as business expenses, so it is not unusual for a self-employed person finding himself getting audited after filing a tax form filled with questionable deductions.
Your chances of getting audited also increase if you work in occupations of dubious reputation. The owners of telemarketing firms, direct marketing agencies, and personal loan companies may find themselves getting audited more often than the general population. These types of enterprises earn significant amounts of income through hardcore sales tactics and consumer abuse, which makes them interesting targets for IRS agents looking to uncover hidden income. If you want to avoid getting audited, avoid employment in gray-area occupations.
The IRS does use a secret formula to determine who may be getting audited during the three year window of opportunity following the filing of a questionable tax return. Called the Discriminant Function System (DFS), this program compares the reported numbers on a particular tax form against a set of norms established by years of demographic research. If a taxpayer with a wife and four children lives in Beverly Hills, California but only reports $20,000 USD in total income, the DFS program will most likely flag the return as suspicious, since the income does not match the city’s demographics. Similarly, someone who reports a significant amount of charitable donations compared to his modest income could also find himself getting audited.
So in short, the trick to avoid getting audited is to report your income as accurately as possible and keep your deductions within acceptable limits. Avoid raising flags with the IRS and you may avoid getting audited, unless of course you win the random “audit lottery” and find new and exciting ways to sweat.