In case you missed the news, the deadline to submit your 2019 taxes is less than two weeks away, so now's the time to gather your paperwork and work your way through that return. The more time you give yourself to complete your taxes, the less likely you are to make a mistake that puts you at risk for an audit.
And speaking of audit risk, there are certain factors you should know about that greatly increase it. For example, failing to report side earnings is a good way to get your tax return flagged. But the total amount of income you report (or don't report) on your taxes could also determine how likely you are to get audited.
Higher and lower earners face the greatest audit risk
Generally speaking, your chances of being subjected to a tax audit are pretty low. In 2019, it's estimated that only 0.45% of tax returns underwent an audit. But if you're a notably high or low earner, your chances of getting your return examined further by the IRS may increase.
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Here's what audit rates have looked like in the past based on income level:
|
Income Range |
Percentage of Tax Returns Audited |
|---|---|
|
$0 |
2.04% |
|
$1-$25,000 |
0.69% |
|
$25,000-$50,000 |
0.48% |
|
$50,000-$75,000 |
0.54% |
|
$75,000-$100,000 |
0.45% |
|
$100,000-$200,000 |
0.44% |
|
$200,000-$500,000 |
0.53% |
|
$500,000-$1 million |
1.10% |
|
$1 million-$5 million |
2.21% |
|
$5 million-$10 million |
4.21% |
|
Over $10 million |
6.66% |
Data source: IRS Databook via CNBC.
As you can see, your chances of getting audited are fairly low if you're an average earner. But even if your earnings are above average -- say between $200,000 and $500,000 -- your audit risk is comparable to someone with earnings between $50,000 and $75,000. It's only once your income really shoots up that your audit risk increases substantially.
Other factors that determine audit risk
Income aside, there are certain actions on your part that could cause the IRS to want to examine your tax return further, and claiming deductions that are disproportionate to your earnings is a big one. You're entitled to deduct a host of expenses, from mortgage interest to state and local taxes to charitable donations. But if those deductions don't make sense, the IRS is apt to ask questions.
Say your reported earnings total $50,000, but you also claim a $15,000 mortgage interest deduction. That's an unusually high amount to pay on that salary (remember, the deduction is for the interest portion of your mortgage alone, not your entire mortgage payment). Similarly, say you own a business and report earnings of $80,000 for it, but you also claim $60,000 in business expenses. That's just plain not going to look right in the eyes of the IRS.
As such, be careful when claiming deductions, and if yours are disproportionately high but legitimate, make sure to retain copies of all documentation to back up your claims. For example, maybe you made the business decision to invest in your company by buying a ton of new equipment and traveling a lot to source new clients. That's something you're allowed to do and claim, provided there's proof.
If you are selected for an audit, most of the time, all it will mean is sending the IRS additional information or documentation to back up the numbers you're reporting or claiming on your tax return, so don't toss your paperwork once your return is submitted. Your best bet is actually to maintain electronic copies of your receipts and documents so they don't get lost or degrade. Remember, the IRS gets up to three years to audit tax returns, and a lot can happen during that time, so make sure to keep your documents secure in case you're asked to produce them at a much later point in time.
