Are You At Big Risk For an Audit?

There are certain groups of taxpayers more likely to get audited. Here are the more common errors the IRS looks for.

May 18, 2014 at 10:00AM

Are you like many Americans and wonder whether or not your most recent tax return is going to be audited? Odds are you have nothing to worry about, as only 1% of individual taxpayers and small businesses get selected for an audit, according to a report by Wallet Hub.

However, there are certain groups of taxpayers who are more prone to being audited, and common miscalculations you'd better get right the first time.


Photo: flickr/401(k)2012

How much do you make?
Income level is the biggest factor that determines whether or not you're likely to be audited.

Those individual taxpayers with the highest incomes are many times more likely to get audited than those with "average" incomes. For those making $200k - $500k, the probability of being audited jumps from 1% to 3%. Filers who made more than $10 million have a whopping 24% chance of being audited.

This is done because the IRS chooses to allocate its resources to those taxpayers who are likely to owe the most if a miscalculation is uncovered.

But it's not just those with high incomes that have a high risk.

Filers who reported no adjusted gross income whatsoever have almost as much audit risk as those who made over $1 million. Taxpayers who reported under $25,000 in income also have a slightly elevated risk. The "sweet spot" of lowest audit risk is for those taxpayers who earned between $25,000 and $200,000.

Other red flags
One of the most common audit triggers is taking a home office deduction, simply because too many people claim it when they aren't entitled to it. Home office deductions apply to areas of your home used exclusively as your principal place of business, so setting up a computer desk in the family room doesn't count. 

If you are self-employed, claiming too many business meals, travel expenses, and entertainment costs are another thing the IRS is on the lookout for.

If you're charitable deductions are very large compared with your income, it could also set off some bells. If the contributions are legitimate, it shouldn't be a cause for concern, but make sure you can properly document everything.

Get the numbers right!
In all fairness, tax returns are incredibly complicated, especially for small businesses, so a small error here and there is to be expected. However, there are some errors that are much more common than others, so you can bet the IRS is on the lookout for these.


Of the math errors uncovered by the IRS, one-fourth of them are errors in the final tax calculation. This is a pretty big's the actual amount of money you have to pay the government, or hope to receive from the government, so this is definitely double-checked.

15% of all math errors on taxes have to do with claiming too many or too few exemptions. If you claim exemptions for five children and your dependent mother-in-law, you'd better be prepared to back it up.

Other common errors include miscalculating the Earned Income Credit (12% of errors) and errors in adding up itemized deductions (10%).

Ideally, you'll add perfectly on your entire tax return, but these areas in particular deserve a very close look.

What happens to those who get audited?
The IRS doesn't lose often: only 11% of audits result in no additional tax obligations.

The penalties for tax mistakes can be pretty stiff, depending on the severity of the error. Failing to file your return on time, for example, will cost you 5% of your unpaid balance per month, up to a maximum of 25%. On top of that, you'll be charged interest on both the unpaid balance and the penalties assessed until you are paid in full.

Worse yet, if you underpay by 10% or more due to negligence -- like a miscalculation -- the IRS can assess a penalty of up to 20% of the amount you owe.

The best way to protect yourself in the event of an audit is to double-check all calculations and get it right the first time, and this is especially true if you're in one of the "at-risk" income levels mentioned above.

The fewer red flags on your return, the less likely an audit becomes, and the less likely you'll have to pay up if you're audited.

Hit back at the IRS with this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information