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What are the chances of your tax return being audited?

On Behalf of | Aug 8, 2016 | Tax Law

It depends. If you earn less than $200,000 per year and use tax software to prepare your return, your chances of a tax audit may be very small. On the other hand, if you earn more than $200,000, the odds increase and if you exceed $1 million in income, the likelihood of an audit approach 1 in 10.

The Internal Revenue Service (IRS) reports that the number of audits of individual taxpayers overall has fallen to a 10-year low, with 0.84 percent rate. Similarly, the amount of revenue recovered by these audits in 2015 had also fallen by $5.19 billion from the prior year.

Most tax audits involved errors in reporting. Mistakes in filings where a taxpayer enters one amount and a 1099 or other filing received by the IRS shows a different amount account for the majority of audits. This is where tax software can help, especially if it imports amounts directly from other documentation of income, by eliminating these data entry errors.

However, if you have a series of complex transactions, changes in investments, business expenses, deductions, and depreciation and combine that with a large income, the odds of an audit increase.

Complexity makes it easier for errors in filing and documentation to arise and transactions or deals that result in losses or other deductions that significantly reduce taxable income are likely to generate red flags from IRS algorithms used to detect potentially questionable filings.

If you own a business or professional practice and have complex transactions, high income and sophisticated investments, relying on tax professionals including tax accountants and lawyers may be necessary to ensure the accuracy and integrity of your filings. This can lessen the likelihood of errors that could trigger an audit and help reduce the time and expense in responding to inquiries from the IRS.