If you have an adventurous, thrill-seeking personality, your life may never be complete until you’ve solicited an income tax audit from the Internal Revenue Service. The good news is that audits have been more frequent in past years, so the chance of being audited has increased. You may not want to leave this up to chance, so here are a few concepts that when applied will tip the scales in your favor.
I would prefer to avoid an audit, but I realize that different taxpayers have different priorities. My strategy is to take the opposite approach of what is recommended throughout this article.
Even if you follow these ten suggestions, you may still not be audited. The exact formula used by the IRS for picking victims is unclear. But those wishing to invite additional stress are welcome to give these a try and report back with their results.
1. Earn more than $200,000. Taxpayers who report income above this level are 50% more likely to be audited.
2. File a loss on Schedule C. Self-employed individuals are already targets for audits, but if you want to increase your chances, report a net loss year after year. Either your business is losing money or you are finding deductions that bring your taxable income below zero; in both situations, you might invite more scrutiny by the IRS.
3. Be selflessly charitable. The government wants you to give your money to worthy causes, but only to a certain extent. If you claim charitable expense deductions that approach your level of income, the IRS will view your return suspiciously. Donating 10% of your income rarely causes a problem, but donating 90% might raise the red flag you’re looking for.
4. Hire your family members. For taxpayers operating a small business, payments to employees are considered deductions. The IRS pays attention when you hire your family members and write off their salaries as deductions. You may have to prove that your relatives are actually working if you want to survive an audit.
5. File your taxes by hand. Using tax preparation software helps to eliminate some of the basic mathematical and transcription errors that are common in hand-written returns. You may not want to intentionally include miscalculations or the wrong Social Security number, but the chances of doing so are increased when you use paper and a pencil.
6. Open overseas bank accounts. Wealthy individuals often use overseas bank accounts to hide assets and investment income from the United States government. Hiding is more difficult now that the government has successfully pressured certain foreign governments and banks to cooperate. If the IRS finds out about your foreign bank account, you could be audited and required to pay penalties.
7. Receive your income in cash. Consider becoming a professional gambler, waiter, or eBay store proprietor. Working in a job where you receive most of your income in cash is a signal that you have the opportunity to hide income from the government.
8. Round your numbers. If the IRS notices that your income and deductions fall neatly on round numbers like $50,000 or $2,000, you are inviting additional scrutiny. Even if you round in an unfavorable direction from your perspective, the government will be interested.
9. Transfer large amounts from your business savings to your personal savings. Banks must report all deposits over $10,000 to the federal government. They will also report deposits of $5,000 or more if the bank teller or manager has a reason to believe the money is coming from a less than reputable source.
10. Refuse to write off common deductions. If you operate a business, the IRS expects your deductions to look like most business that operate in a similar capacity. For example, certain business owners who do not claim deductions for travel may leave the IRS wondering what else has been left out of the tax return.
I am not condoning lying on your tax return either to avoid or welcome an audit. As I mentioned above, I would prefer to avoid an audit by the IRS, so I will work with my accountant to make sure I have no red flags without detailed substantiation. These suggestions above are only for those who wish to bring difficulty into their lives by inviting the IRS into their homes.
Photo credit: Robert S. Donovan
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{ 17 comments… read them below or add one }
ha! Love it. :) Sometimes the best “how to” articles are the ones that take the opposite approach. I’m still working on my taxes this year, but I work closely with my accountant to avoid as many red flags as possible. As a small business owner though, there are always a few little things that could raise red flags.
It looks like I’m still clear of all of these red flags. I wouldn’t mind getting audited for earning more than $200K sometime soon, though. :)
That’s only the case until you pay whatever your pay increase was in the form of CPAs and Attorneys to fight off the IRS lol
Flexo,
In regard to #5, I’ve heard differently. Aside from that, I’ve made certain mathematical errors that resulted in the return being sent back to me for correction, not an audit. They are two totally different things.
I’m trying my best to be targeted too! With huge medical deductions that have driven my taxes to zero and a tax credit to boot, I’ll get back more than I paid in. ($3.00 Woohoo). I’m looking forward to it (right!) but I’m guarding my receipts more closely than any other possession I’ve got.
I don’t normally comment on these types of things, however #9 is totally false. You are talking about a Currency Transaction Report or a Suspicious Acivity Report. These are filed by a bank, a casino, etc. if you deposit more than $10,000 IN CASH or less if they think you might be structuing to avoid the trigger. However, this report is for money laundering and has nothing to do with the IRS. The only way the IRS could see transfer from your business savings to personal savings is if they subpoenaed those records and even then it’s hard to tell what’s a business savings vs personal savings.
What are your thoughts on the discrimination against those who make more than $200,000? If you make more than $200,000 you are paying much more in absolute taxes. Is this the gov’t getting greedy?
Also, can we talk more about the amount of charity donations as a percentage of one’s income? Let’s say I make $1 million/yr…. donating $100,000 sounds like a lot of money, but only 10% of my income. Is that LESS suspicious than someone making only $100,000 a year but donating $20,000 of his income for example?
thnx
This is my favorite first sentence of the year. Genius!
terrific post flexo! among my favorites.
Wednesday must be opposite day. Got a good laugh out of this one.
Rounding off cents to the nearest dollar is perfectly acceptable and explicitly documented as OK by the IRS. Rounding numbers is only a problem if you round to very large figures. i.e. lots of figures like $50,000 or $10,000 or $5,000 look suspiciously made up.
I’ve heard that doing taxes by hand is actually less likely to get audited cause its simply more work for the IRS to screen and then audit a hand written return compared to a computerized return. So they end up reviewing and auditing a lower % of hand written returns. I don’t know for sure how true this is but it seems to make sense.
lol totally weird yet amusing :)
I only take a minor issue with # 5. Rather than ‘file your taxes by hand” it would be better to be “prepare your taxes manually”. I could use software to prepare my taxes and then file them by hand. Thus I am then not hit with calculation mistakes. Whether you do it with software or by hand you can always enter a wrong number, like your SSN.
Maybe Joe Stack should’ve read this article before he went into the IRS building – like 20 years ago!
I’d say, just pay them, give the IRS generously and they’ll stay off your back, they just want your money. If you are gonna pick a fight, pick the mafia, they will just kill you and it’s over. The IRS will destroy your life and that of your kids and their kids…
If you want to go looking for an audit you should do all the things Flexo mentioned above but be sure to leave out a nice big deduction that you could take, so when they do audit you, you can file an amended return and get back more money instead of having to pay them more, always fun to throw it back in the face of the IRS, audits go both ways… which many people fail to realize.
Cash charitable contributions are limited to 50% of AGI, non-cash are limited to 20-30% of AGI. No one is deductiong 90% in one year.