TRIGGERING AN IRS AUDIT
Many taxpayers fear being audited. While the chances of being audited are actually less than 2%, the likelihood of an audit rises as the taxpayer's income increases.
Tax returns indicating a high likelihood of understated income, or overstated deductions may be flagged for further review. The IRS evaluates tax returns for audit potential based on such factors as total income,
deduction totals, and deduction classifications. In addition, there are a number of IRS "hot" areas, such as tax shelters and home office expenses, that will likely draw attention to a particular return.
Generally, IRS audits focus on capital gains, rental losses, or itemized deductions. The mail audit, the most common type of audit, is typically triggered when items reported on a given return do not match 1099 information forms filed. These include interest income, dividends, capital gains, and miscellaneous income. To avoid this type of audit, try to report items on the return as they are reported on the 1099 form. In addition, avoid combining separately reported items or amounts.
Office and field audits are more complex, typically addressing such areas
as rental properties and businesses. The best defense in an audit is adequate
documentation supporting items on the return. In fact, while the year is still
fresh, taxpayer's might want to review the year's tax return. Match 1099 information
returns with reported income, and tie reported deductions to receipts and canceled
checks. Then, file these documents with a copy of the tax return. The ability
to support every item on the return, is the best way for the taxpayer to prepare
for an audit.