What can I do to lessen my chances of being audited?

The IRS typically looks for discrepancies in the following: Schedule A (itemized deductions, Schedule C (profit or loss from a business) and Schedule F (profit or loss from a farm). For Schedule A, in which you itemize deductions for such items as charitable expenses and mortgage interest, the IRS tends to audit a smaller percentage of returns where the deductions are less than 35% of adjusted gross income. If you go above 44%, your risk of audit increases substantially.

If you file a Schedule C for your business, try to keep expenses under 52% of gross income. Any expenses over 67% of income is a red flag to the IRS for an audit. With Schedule F, losses over 50% of gross farm income invite scrutiny, while losses over 71% may trigger an audit. If you file both a Schedule A and a Schedule C, add your Schedule C expenses as a percentage of gross income with 1.5 times your Schedule A expenses as a percentage of your total gross income, and keep this figure under 10% of your income.

Finally, no matter what you do, there is no avoiding a random audit. More than 150,000 taxpayers are subjected to random audits each year.

Case Studies: Lessons on Reducing the Risk of IRS Audits

Case Study 1: John’s Itemized Deductions

John filed a Schedule A to itemize his deductions, including charitable expenses and mortgage interest. However, he failed to maintain a balance between his deductions and adjusted gross income. The IRS tends to audit returns where deductions exceed 44% of adjusted gross income. In John’s case, his deductions accounted for 50% of his adjusted gross income, significantly increasing his audit risk.

Case Study 2: Lisa’s Business Expenses

Lisa is a self-employed individual who filed a Schedule C for her business. She incurred various expenses related to her business operations, but she failed to keep them below 52% of her gross income. The IRS flags returns where expenses exceed 67% of gross income for an audit. Unfortunately, Lisa’s expenses amounted to 70% of her gross income, making her susceptible to an audit.

Case Study 3: David’s Farm Losses

David, a farmer, filed a Schedule F to report his farm income and losses. However, he experienced substantial losses, exceeding 50% of his gross farm income. The IRS pays close attention to returns with losses surpassing 71% of gross farm income, potentially triggering an audit. In David’s case, his losses amounted to 75% of his gross farm income, making him a prime candidate for an audit.