Don’t be lured into a false sense of security. The statistic is a blended rate covering many types of incomes and taxpayers. Here are some of the reasons returns were audited:
- No adjusted gross income (AGI). For AGI of zero, audit risk jumped to over 5%. The IRS benchmarks AGI because it is total income including losses from businesses and investments.
- Large adjusted gross income. Audit risk was nearly 2% for returns with AGI over $200,000. Audit risk climbed to 16% when AGI was $10 million or more.
- International returns. Due to a focus on offshore tax evasion, the audit rate of international returns was almost 5%.
- Estate taxes. Approximately 8.5% of estate returns were audited. Gross estates of $10 million or more were tagged with a 27% audit risk.
- Corporate returns. Small corporations experienced up to a 2% audit risk. The risk for large corporations with assets over $20 billion was 85%.
Be aware that even if you don’t fit into any of these categories, your return may still be selected for audit. That’s one reason it’s essential to keep good records to support all deductions and credits you claim on your tax return for at least three years after filing.
Examples of required record-keeping include:
- When you deduct expenses for meals and entertainment, the written evidence must show who was in attendance and what business was discussed.
- A home office deduction must be supported by evidence showing your home office is used regularly and exclusively as the principal place of business.
- Certain non-business property that you gift, donate, or intend to distribute through your estate requires an appraisal.
If any of the above risk factors are present in your business’s books, talk with your CPA or financial adviser on what steps to take to protect yourself from an audit.