“Sometimes there’s no avoiding an audit,” Cole says. “The IRS thought process is that the highest income returns will be the most likely to have large findings in terms of dollars. Auditing someone with $100,000 of income is just not going to turn up enough revenue to justify the audit.”
The IRS audits high-income earners about every five to 10 years, according to Cole. An excessive number of estimates on a return, such as all amounts in even thousands, can raise an audit red flag, he says.
Other potential triggers are business losses, excessive charitable contributions, non-cash contributions and large itemized deductions with low income, says Scott Kadrlik, a CPA at Meuwissen, Flygare, Kadrlik & Associates in Eden Prairie, Minn.
Documentation remains key in audit defense. “Auditors are using the simple documentation rules to disallow tax deductions,” Kadrlik adds. “Charitable contributions greater than $250 require a receipt from the organization and a copy of the cancelled check. Without this documentation, it can easily be denied by the auditor. The same thing applies to business expenses that don’t have the who, what, why and where.”
“I see too many taxpayers avoid certain deductions as they fear just claiming certain items might trigger an audit,” says Kollauf from BMO Private Bank.
Report all income, and if you’re self-employed it might make sense to incorporate, Seltzer says. “If someone changes from being a sole proprietor to an owner of an S corporation, that move will greatly reduce audit risk.”