5 Myths and Facts of Getting Audited

Although the IRS audits hundreds of thousands of returns each year, audits represent less than 1% of all returns filed so there is generally little cause for concern.  There are, however, some red flags that may cause the IRS to place additional scrutiny on your return– but those red flags might not be what you think. Myth: The likelihood of getting audited increases with e-Filing.
Fact:  You are actually less likely to be audited with e-Filing.  Mathematical errors are a trigger for a tax audit and e-Filed returns offer some safeguards for math errors thereby avoiding these kinds of mistakes.
Myth: The likelihood of getting audited increases if you file an extension.
Fact: Many tax professionals actually see fewer audits on tax returns that are submitted after tax season; some believe that IRS auditors have less incentive to audit a return once their “quota” has been met.  Whether or not this “quota” truly exists is a matter of speculation. At any rate, anyone can get a  6-month extension upon request, and millions of people and businesses request them each year, so it is unlikely to have any impact on the chance of an audit.  Remember, however, than an extension of time to file is NOT an extension of time to pay!
Myth: The likelihood of getting audited increases if you amend your return. 
Fact:  Tax returns that contain mistakes and/or inconsistencies with other records such as employer filings and other income-generating sources (e.g., partnerships, LLCs and other  pass-through entities) are what increase your chances of getting audited.  Seek advice if you believe your returns contain mistakes.
Myth: The likelihood of getting audited increases if you have a home office. 
Fact: Not any more.  The IRS recognizes that the era of virtual offices is upon us and millions of people work from home. As long as your deductions are accurate, reasonable, and don’t include personal expenses, having a home-based office does not make you any more likely to be audited than working elsewhere.
Note, however, that filing certain forms and schedules with your return may increase your chances of being audited. For example, triggers include Schedule C losses for a hobby-turned-business and high valuations on Form 8283 Noncash Charitable Contributions. Also make sure that you are filing all of your 1099s – the IRS matches your 1099s with the corresponding 1098s, and inconsistencies between them is a virtual guarantee of an audit.
Myth:  Only rich people get audited.
Fact: For the most part, tax returns are selected for audit when their DIF (Discriminant Function System) score is higher than average. Although the amount of income declared is a factor, there are 66 different areas of interest that make up a DIF score, including – as noted above - the number and type of deductions made and the schedules included in the return.  Certain businesses are more likely to be audited, such as real estate investing, employers who work with independent contractors, and new small businesses that could be classified as hobbies, to name a few.  Note that if the IRS is dissatisfied with a business return, its owners’ personal returns as well as the tax returns of related entities will be placed under increased scrutiny – being rich, however, is not the primary motivation for these audits.