American taxpayers are digging through their receipts in hopes of finding and claiming every tax deduction available, and soon IRS watchdogs will be scouring those tax returns to see whether any of those deductions appear out of whack. Although the IRS doesn't disclose its secret sauce for determining when tax deductions will prompt an audit, it's safe to assume that claiming outsize deductions will raise red flags.
Read on to learn whether you're deducting more on your taxes than the average American and could be flirting with an IRS audit.
Stacking up to total deductions
Not everyone itemizes their taxes, but the percentage of people who do itemize climbs along with income. According to the Congressional Research Service, or CRS, only 22% of tax filers earning between $20,000 and $50,000 per year choose to itemize their deductions (rather than claim the standard deduction), while at least 84% of people earning over $100,000 per year itemize their deductions.
Using the following table, find the amount of your adjusted gross income on your tax return and compare your total itemized deduction to the average American's. Are you claiming less than they are? If so, you might be leaving some valuable tax deductions on the table. If you're claiming more, then you may want to double-check your calculations and make sure you have all the proper supporting documentation handy in case IRS auditors come knocking.
Line by line
Knowing how your total itemized deductions stack up with the average for your peer group doesn't offer much insight, but if you see notable discrepancies, then finding out why the numbers are so different can be worth your while. So if you see a reason to double-check your deductions, then it may help to compare your individual itemized deductions to those claimed by taxpayers earning similar income.
The table below shows what taxpayers in various income groups deducted, on average, in several categories.
For example, the average tax filer with adjusted gross income between $50,000 and $100,000 claimed $8,645 in home mortgage interest in 2011, while the average tax filer with income between $100,000 and $200,000 claimed a home mortgage deduction of $15,444. Two other categories that taxpayers should pay particular attention to are charitable gifts and unreimbursed business expenses. These categories offer a treasure trove of often overlooked deductions, but they're also among auditor's favorite places to find errors.
If your charitable deductions are substantially lower than average, take a close look and make sure you're including any cash gifts made to nonprofits like churches, as well as clothing donations made to organizations like Goodwill. If your business expense deductions are looking light, double-check that you're deducting every expense you're legally entitled to. And if your deductions for these categories are sky-high, then be aware that the IRS may scrutinize your return more closely. Don't let that keep you from taking these deductions, but simply make sure you have all the information necessary to back up your claims.
One more thing
Although using benchmarks like these can alert you to deductible categories you hadn't thought of and help you see where you might have made mistakes, your best policy will always be to stick to the rules, check your math, and save your supporting documents. IRS auditors are pretty strapped for time, so they tend to focus on returns that are most likely to contain mistakes. As a result, the percentage of tax returns that are audited varies greatly depending on income. Historically, the IRS audits less than 1% of low-income earners' returns, but it audits more than 2% of returns filed by those earning more than $200,000. Regardless, taxpayers shouldn't fret over the potential for an audit. After all, deductions are designed to help, rather than hurt, taxpayers.