How Does the Government Pick Tax Returns to Audit?

By mfishman

Statistics amply show that just about 1 % of all tax returns get audited each year, so it is likely that you can get audited in your lifetime. We are discussing below few reasons due to which government picks tax returns for audit:

Filing your tax return with a Schedule C

In case you file your tax return with Schedule C, your chances of getting audited significantly increase from 0.5 % to 2.6 % (average business returns audited in 2009).

Actually Schedule C is a used by taxpayers to significantly over deduct their expenses apart from itemized deductions. government would want to ensure that these deductions are totally legitimate and income which is being reported actually matches the taxpayer’s 1099-MISC

Filing your tax return without AGI

A tax return which is filed with adjusted Gross Income amounting to $0 has much higher chance of getting audited than the returns which are filed with incomes in the range of $1 to $200,000. government wants to ensure that any income is not left off from the return or any bogus deductions are not being filed for claim.

Claiming Home Office Deduction (Form 8829)

Tax returns accompanied by a Schedule C expenses for usage of home office has a greater chance of being selected for an audit than any tax return with a Schedule C without any of the expenses for using home office.

You can use this deduction only if you use home for your business and government can review these claims to ensure their accuracy.

Filing your tax return with very high itemized deductions

If your itemized deductions equal a large percentage of AGI, there are greater chances of government selecting your return for an audit.

Filing your tax return with Schedule E/Form 2106

In case you file return with schedule E (supplemental loss or income)/ form 2106, then your chances of government audit increase by 1.4 %. government actually views these tax returns quite closely for ensuring that taxpayer is reporting their entire income on Schedule E and that they are not over deducting business expenses on the form 2106.