Ready For An Audit? It Could Happen If You Itemize
Friday Apr 04, 2008
Mahfuz L. Mehfeh
 

In my early career days, back in the 1980s, I was audited by the IRS. Twice.  Audits were at an all-time high in the '80s, and I had a slew of itemized deductions based on my income as a freelance writer, even though my income in both instances was under $17,000.  Turns out, the Internal Revenue Service didn't care how little I made; they only cared about how much I was deducting, which was, compared to my income, a lot. 

Indeed, itemized deductions account for one of the areas most open to scrutiny by the agency. And that remains true today.

Tax experts say that your odds of an audit can often be traced to your so-called DIF score. What's the formula for this mysterious IRS score? They're not telling, but there are a few factors that will affect your score and increase your possibility of getting an audit.

As noted, a lot of deductions will always bring extra scrutiny to your tax return, and affect your DIF. The IRS helpfully publishes a "Statistics of Income" book that shows the averages for different businesses based on income.  But take note, the average in each category takes into account only those people who claimed deductions in that category. As a result, the averages overstate how much a typical taxpayer deducts.

In my case, so many years back, my deductions were near as much as my income, thanks to a lot of family help when I was down on my luck. So, although my deductions were legitimate, the unsmiling drone who brought me back to his cubicle to look through my literal shoe box of receipts, also wanted a note from my father - I kid you not - along with his phone number to query him about how much he had "loaned" me.  The gentleman was stymied, I should add, when my father reasonably told him that he didn't keep a record of how much money he willingly gave his son, as it wasn't a loan.

Along these lines, people who are self-employed are often the most vulnerable IRS targets, not only because they claim a slew of deductions, but, statistically, they also tend to be aggressive in writing off many day-to-day expenses.

Now, there's nothing wrong with that when they're business-related, of course, but you should know your return will be looked at more carefully than the fellow down the street, without the itemized tax return. 

If you had a particularly good year, as in making over a million, you also have a good chance of being audited, at least statistically.  Last fiscal year, the agency audited 31,382 million-dollar earners, up 84 percent from the year before.

You don't, though, have to make that much to get the once-over from the IRS, as $100,000 is a magic number to them, making your chance of getting audit better than average.

So, if you earned less than $100,000, you have a 0.93 percent chance of being audited, vs. earning more than $100,000, when you jump to a 1.77 percent chance.

Worse still, if you earned more than $200,000 -- your audit odds jump to 2.87 percent, which some might consider a disincentive to a successful career.

Finally, if you have a job where cash is king, such as a restaurant worker, gym trainer, or hairdresser, occupations quite common in the gay community, the IRS is long-since wise to the fact that people in these industries historically under report their income.

So, honesty in reporting your income might be considered prudent in these cash circumstances.  Also, be mindful of what you deposit in your bank account, because in the event of an audit, they will scrutinize your bank statements to see how income and deposits match up.  If you deposited more than you claimed you earned, you'd better have a good story ready to go. 

 

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