The Top Ten IRS Tip-offs for an Audit

Double-checking the amounts you list on your return might help prevent an audit.

Double-checking the amounts you list on your return might help prevent an audit.

The IRS audits less than 2 percent of tax returns annually, according to Joy Taylor, assistant editor of "The Kiplinger Tax Letter." Though you probably have little chance of getting audited, you can benefit from learning common audit triggers and trying to avoid them. This way, you can reduce your chances of a pulse-raising audit even further.

Mismatched Income Numbers

Reporting incorrect amounts for income received or taxes that have been withheld can lead to an audit. Though you have to report this information on your tax return, the IRS receives this data from the same parties that send W-2s and 1099s to you. If your numbers do not match the IRS data, the IRS may flag your return for an audit.

Self-Employment

If you are self-employed and file a Schedule C, the form required for reporting business income earned as an individual rather than a corporation or partnership, the IRS may look more closely at your return. Your chances for an audit might prove even higher if you claim losses in back-to-back tax years or if your self-employment income exceeds $100,000.

Travel and Entertainment Expenses

Claiming high amounts of business-related travel and entertainment expenses can lead to an audit. Even having a high enough business income to support these expenses might not spare you from an audit.

Large Deductions

Taking large deductions can sometimes trigger an audit. This might happen if you run a business and claim questionably high expenses. For example, the IRS might look more closely at your return if you report $50,000 in business income yet deduct $40,000 in business expenses.

Married Filing Separately

You can file a return separately from your spouse. However, if you both attempt to take the same deductions, this might trigger an audit. For example, the IRS might flag you for an audit if you both take the head of household deduction.

Real Estate Losses

If you own rental property and claim losses, you could be headed for an audit. IRS rules limit how much you can claim if you rent property as a passive activity. If you spend more than 50 percent of your time and at least 750 hours a year on real estate as a business, you will have more leeway with claiming losses. You must meet both rules, which takes into account that people spend varying amounts of time on real estate, but 50 percent of your time does not have to equal 750 hours exactly; it can exceed it. If you spent 15 hours a week on this business, for instance, but worked 35 hours a week total, you could meet the 750-hour rule but fall short of the required 50 percent of your working time. Some people attempt to deduct losses to which they are not entitled, so listing real estate losses can prove a red flag for an audit.

Clerical Errors

Simple errors — like making a mistake with your Social Security number or your tax identification number — can lead to an audit. The same holds true for the identification numbers you list for your dependents.

Omitted Information

Failing to answer a required question or omitting applicable forms and schedules can trigger an audit. Seek the help of a qualified tax professional if you do not understand a question or if you need help completing a required form.

High Income

According to Kiplinger, taxpayers with incomes above $200,000 face an audit risk more than three times that of people with lower incomes.

Business Types

Running a business that deals mostly with cash increases your risk of an audit. Since businesses that receive most of their income in the form of cash might fail to report all of their earnings, the IRS flags their returns more often. Such businesses can include taxi services, beauty salons and establishments that serve food and beverages.

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