According to an official report from the Internal Revenue Service, an average U.S. taxpayer with an annual salary of under $200,00 has about a 1 percent chance of being audited in a given year. This is slightly higher than past years, when the audit rate hovered at around 0.98 percent amidst an overall tax liability that was hundreds of billions of dollars lower than it is today. For wealthy taxpayers or those that operate their own businesses, the risk of being audited is considerably higher. This can lead to a number of negative repercussions, including harsh fines or even an audit fraud case.
Fortunately, Texas residents hoping to avoid such penalties can take a number of steps to protect them against a federal audit. High-earning Texans should take particular caution as those earning over $1 million each year have a more than 12 percent chance of being targeted by an audit. Many wealthy taxpayers find it useful to hire an accountant or other tax professional, but it is important to select such help carefully; the IRS often audits all clients of a preparer it suspects of filing fraudulent or inaccurate returns.
The Wall Street Journal estimates that self-employed taxpayers are about 10 percent more likely to be audited when they opt for a Schedule C filing rather than a corporate return. As such, many experts recommend that business owners incorporate their businesses in order to avoid being targeted for reporting losses that are not considered to be acceptable business expenses by the IRS. Such “fully or partially noncompliant” losses are present in about 70 percent of all tax returns filed by sole proprietorships, according to a study from the U.S. Government Accountability Office.
Many filers simply fail to report all their income. Some may unintentionally forget to list money they earned on gambling profits or freelance work, while others try to furtively hide their investment earnings. Experts stress that withholding income for any reasons greatly increases one’s chance of being audited.
Source: MoneyTalkNews, “10 Tips to Avoid an Audit,” Brandon Ballenger, Feb. 20, 2013