As long as you're honest on your tax return and can back up all of your claimed income and deductions, an audit doesn't need to be scary. However, as anyone who has been through the process can tell you, it's certainly inconvenient. With that in mind, here are some things that could raise red flags at the IRS when you file your 2015 tax return.
Selena Maranjian: If you don't want to get audited in 2016, think twice before taking extra-large deductions for charitable contributions. The IRS pays close attention to such deductions, because some ethically challenged people see them as an easy and sneaky way to trim their tax bill.
How much is too much to deduct, though? Well, it depends. As you can imagine, the IRS knows a lot about our tax returns because it receives many millions of them each year and it has learned what to expect from various kinds of returns. It knows, for example, what the general range is for charitable contributions from households with four people and incomes near $100,000. Thus, it knows when a taxpayer in such a household is taking an unusually large deduction.
You can get an idea of what is customary by income level from the IRS itself. It publishes Statistics of Income (SOI) reports, which show, for example, that in 2011, households with adjusted gross income (AGI) of between about $200,000 and $250,000 that itemized their deductions deducted an average of 2.4% of their income to charity. Interestingly, households earning less were generally more charitable, with those earnings between $45,000 and $50,000 averaging 4% in contributions.
Of course, if you want to make or have made a lot of sizable donations, don't let tax worries stress you out. If you get audited over them, you will simply have to justify them to the IRS, by providing documentation such as receipts. For donations of money or property valued at $250 or more, the IRS requires "a bank record, payroll deduction records, or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift."
Matt Frankel: If you drive your vehicle for business purposes -- not including your normal daily commute -- you are allowed a deduction for the miles you drive. For the 2015 tax year, the standard mileage rate is $0.575 per mile. So if you drive 1,000 miles for business purposes during the year, you'll qualify for a deduction of $575. If your vehicle expenses for your business travel were greater than this amount, you can choose to calculate the deduction this way instead.
Where people run into trouble is claiming that they use a vehicle for business purposes 100% of the time. Unless you own a separate vehicle that you use solely for business, this is highly unlikely to be a truthful claim -- virtually everyone uses a primary vehicle for some non-business purposes.
The point is that if you use your vehicle for business most of the time, don't try to round up. Claiming 100% business use of a vehicle can be a major IRS red flag, and you may be asked to substantiate your claim that you never drive anywhere for personal use -- period. As you can imagine, that's difficult to do if you only have one vehicle. The IRS is smart -- it'll know you somehow got to the grocery store and picked up your kids from soccer practice.
Of course, if you legitimately used a vehicle only for business, go ahead and claim it. Just be aware that it's likely to raise red flags at the IRS.
Jason Hall: This table makes it more clear how much higher your likelihood of being audited is if you're wealthy:
|Size of Adjusted Gross Income||Examination Coverage in Fiscal Year 2009||Examination Coverage in Fiscal Year|
|Examination Coverage in Fiscal Year|
|No adjusted gross income||4.04||3.19||5.26|
|$1 to under $25,000||0.97||1.18||0.93|
|$25,000 to under $50,000||0.70||0.73||0.54|
|$50,000 to under $75,000||0.68||0.78||0.53|
|$75,000 to under $100,000||0.57||0.64||0.52|
|$100,000 to under $200,000||0.67||0.71||0.65|
|$200,000 to under $500,000||1.86||1.92||1.75|
|$500,000 to under $1,000,000||2.77||3.37||3.62|
|$1,000,000 to under $5,000,000||5.35||6.67||6.21|
|$5,000,000 to under $10,000,000||7.52||11.55||10.53|
|$10,000,000 or more||10.60||18.38||16.22|
You can also see that audit rates sharply increased for those making $200,000 or more in 2010. Since that year, the IRS has dedicated more resources to auditing those who earn the most. Then-IRS commissioner Doug Shulman called the IRS's creation of its Global High Wealth Industry Group a "game-changing strategy" at the time.
However, the IRS has seen its budget get cut consistently for several years, and this reduction has cut the level of auditors significantly. The impact is clear, as nearly every income bracket was audited at a lower rate in 2014 than in 2010, and only those earning $500,000 or more (or reporting no income) being audited at a higher rate than in 2009.
Dan Caplinger: One big problem that gets taxpayers into trouble now more than ever involves misreporting the cost basis for a particular investment that they've sold during the year. In the past, brokers were only required to report sales proceeds, and so taxpayers had a lot of latitude to report cost basis based on their own calculations and supporting records.
Now, though, brokerage firms are required to keep track of cost basis and report it directly to the IRS each year. If you don't report the same numbers to the IRS, then you'll trigger a red flag that could result in a recalculation of your tax liability or even a full audit.
As you look at the tax reporting forms you get from your broker, it's essential to look and see whether your financial institution has calculated your cost basis correctly. If not, then you have two alternatives: you can go back to your broker to get a corrected tax form, or you can indicate the discrepancy on your own tax return and provide an explanation. The worst thing you can do is simply to ignore the discrepancy, because that's what's most likely to get the attention of the IRS and potentially trigger an audit.
Brian Feroldi: One financial move that increases your chances of being audited after you file your return is pulling funds from your retirement accounts before you reach age 59 1/2. Most early withdrawals that come out of a retirement plan such as a 401(k) or an IRA are subject to an additional 10% tax, so the IRS tends to flag returns that contain any early withdrawal to make sure the taxpayer is following all of the rules.
One IRS study found that almost 40% of individuals who took an early draw on their retirement accounts ended up making a reporting mistake, the most common one being that they didn't qualify for an exception to the 10% penalty. For that reason, that IRS tends to pay particularly close attention to any return that's looking to sidestep the extra payment.
There are a number of circumstances under which the IRS will allow individuals to raid their retirement accounts penalty-free, such as paying for a qualified higher-education expense, covering a very large medical bill, or, for first-time homebuyers, making a down payment on a home.
If your return contains an early withdrawal, you should be especially careful to make sure you're following the rules in case you get audited. Take a hard look at this IRS table to make sure you're using your funds for a qualified expense.