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Should you gamble with your taxes?

Chris Jones: Greene Publishing, Inc.

Last year, the number of people audited by the Internal Revenue Service (IRS) dropped to its lowest point since 2003. This marks the sixth year in a row that the number has dropped. In 2016, of the approximate 242 million adults living in the United States, just over one million people were audited. Since 2010, the IRS' budget has decreased by 17 percent. The cuts have caused the service to reduce its workforce, scale back training, and delay upgrades to programs. The decreasing budget seems to correspond with the decline in taxpayer audits.

The low probability of actually being audited may tempt some taxpayers to flirt with cheating on their taxes.  However, in the words of iconic optimist Lloyd Christmas, even though the odds are extremely low, when it comes to actually being audited: “So you're telling me there's a chance.”

IRS computers look for discrepancies in tax documents. Listing different figures in different  locations for the same item, for instance, is one thing that will throw a red flag in the IRS' systems. Small business owners and those who are self-employed have the most discretion with reporting income, and therefore might be more tempted to fib on their tax forms.

There are several major red flags that will increase your chance of getting audited. First, when business income and expenses don't meet national averages, you are more likely to be scrutinized. This is because small business owners have the most possible ways to abuse the tax system. For example, if your occupation does not typically require travel, and you log thousands of miles driven to your deductions, the IRS might take notice.

Second, if you claim higher than average deductions, on such things as charitable contributions, in relation to income, a flag may be raised with the IRS. Claiming “rare” deductions is another way to raise suspicion.

Lastly, continuous and highly inflated rental property expenses are often associated with IRS audits. For example, many expenses that you report on IRS Schedule E must be depreciated, not deducted every year. If you are showing astronomic losses year after year on a particular rental property, you may have a higher likelihood of being audited.

Being honest and detailed in your tax preparation may not be a surefire way to avoid an audit, but its the best way to avoid penalties if you are. Professional tax preparers are a good option to consider if you are uncomfortable with your tax filing skills; and most importantly, their services are tax-deductible.

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