As you file your tax return, do you wonder whether you're likely to get audited?
You can take some comfort in the fact that audits are remarkably rare, hitting about 1 percent of taxpayers each year. However, the rate is rising, and if you happen to pull a few audit triggers, your chance of getting that ominous letter or phone call from the Internal Revenue Service can soar tenfold or more, experts say.
"I am hearing about more audits than I ever have," said Roni Deutch, a California tax lawyer who has been practicing for 17 years. "People will try to alleviate your fears and tell you that an audit is not a big deal. It is a big deal. It's like having a root canal without Novocain."
The number of returns audited by the IRS jumped 7 percent last year to 1.38-million, up from 1.29-million in 2006.
If you're an honest taxpayer, you should never avoid taking a legitimate deduction just because it might trigger an audit, said Jeff Schnepper, author of How to Pay Zero Taxes.
But you do need to be aware of the things that might get you audited, the different kinds of audits and how you ought to deal with them.
Your odds of an audit hinge partly on something called a DIF score. The formula is closely guarded by the IRS, but tax experts have identified some factors that are likely to boost your score and thus your chance of an audit:
• Unusually high deductions. Deductions that stray from a normal range will cause your return to get further scrutiny. But what's normal? Each year, the IRS publishes a "Statistics of Income" book that shows the averages.
• High income. Your neighbors may envy you if you make $1-million or more, but they won't be so envious of your status as an IRS target. In its latest fiscal year, the agency audited 31,382 million-dollar earners, up 84 percent from the year before.
• Cash businesses. If you have a job in which you might be paid in cash — say you're a bartender or a hairdresser — the IRS is likely to look closely at your gross income to determine whether you failed to report everything you earned. A telltale sign: You deposit more in your bank or brokerage accounts each year than you report as earnings on your tax return.
• Self-employment. Tax authorities target self-employed people because they're often aggressive — sometimes abusive — in writing off day-to-day expenses.
• Errors. You gave $1,100 to charity, but your finger stuck on the "zero" key when doing your taxes and you reported $11,000 instead. Or you transposed two digits in your child's Social Security number — or failed to report $57 in income from your bank checking account.
Types of audits
There are two types of IRS audits: correspondence audits and field audits. The good news is the vast majority of audits are correspondence audits, which can be as simple as the IRS asking you a question by mail and having you respond by mail. The simple errors described above, for instance, are likely to generate a letter asking you to explain the discrepancy.
If you goofed, admit it and pay whatever additional tax you might owe. If you didn't, provide the requested information and an explanation.
If you are called into the IRS offices or an agent wants to visit you to see your records, the review is likely to be broader and more serious than a correspondence audit. If you don't have one, it may be time to consider hiring a professional to represent you.
Some other ways to deal with an audit — or the prospect of being a high audit risk:
• Head 'em off. When you claim an unusually large deduction, Schnepper said, consider adding a note to your return explaining the writeoff.
• Prepare. Always keep good records and keep particularly meticulous records of anything that you know is likely to be an audit trigger.
• Focus. The IRS will always tell you what information it is looking for when you're being audited. Provide that information and no more, Schnepper said.
• Be polite and professional. If you're angry about the audit, keep it to yourself or seek therapy. Don't take it out on the auditor.