Audit Answers

Q.  What are my odds of being audited? 

A.  Less than 1 percent of tax returns are audited.  The three main ways that a return is selected for an audit are 1) random selection, 2) matching supporting documentation against the return, and 3) the discriminant function system, DIF, which assigns numerical weights to specific items on a return.  A return might be audited if the total DIF score for the return exceeds a predetermined threshold.

While all of the exact items that are used in the DIF systems are not known, the following list includes some of the items thought to trigger a DIF flag. 

For personal tax returns they include:

• high incomes not subject to withholding;
• apparently excessive deductions relative to a taxpayer's income level;
• a high amount of charitable contributions compared to the average gifts of people within your tax bracket ;
• home office deductions, in some cases.  Although home offices can offer tax advantages, be aware of the specific regulations surrounding deductions;
• when a return has missing information , it will be flagged for review;
• discrepancies such as an address change combined with deductions claimed for owning a residence when a taxpayer has not reported a sale of an old residence;
• large miscellaneous itemized deductions, as well as state, local, and property taxes, or any other items that may trigger the alternative minimum tax.
• complex investment or business transactions without clear explanations.

Red flags for business returns include:

• High salaries for corporate officers in C-Corporations, which could lead to reduced tax liabilities.
• Low salaries in S-Corporations (taking higher profit distributions and lower salaries to minimize the tax).
• Using the wrong tax reporting system, accrual vs. cash basis.
• Inappropriate use of independent contractors (1099), when they should actually be classified as employees (W-2).
• Excessive miscellaneous expenses that don’t fit neatly into a recognize expense category.

If you’re unsure about any of these potential red flags, always contact a BGR professional to discuss your specific circumstances.