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What Makes You Prone To A Tax Audit?

Well, anyone can become afraid after getting to know that his/her tax return has been selected for an IRS audit. However, audit anxiety forms an essential component of the voluntary compliance system. Consequently, we can examine the impact of tax audit probability and the prospective role of goal conflict in the tax-evasion judgments of an individual. In particular, it has been observed that the probability influences the compliance decisions of a tax payer if the goal conflict is less. However, in case of higher goal conflict, the compliance of tax payers is low irrespective of the audit probability. Moreover, this emphasizes the significance of gaining the support of taxpayers for government programs. Besides this, the government might also encourage voluntary compliance in tax payers.

What are the criteria for your tax returns getting audited? How does the government decide that your tax return is subject to an audit? Are there certain specific ways of avoiding a tax audit? Well, an individual is likely to have a higher audit probability if he/she falls into specific categories or reports specific things on tax returns. These include:

  1. Tax shelters: Although majority of the new tax shelter write-offs are eliminated through tax reforms, the existing tax shelter deductions are an area of interest for the authorities. Therefore, the tax returns with losses and passive income are subject to scrutiny.
  1. Tax protests: Tax protests without any substantial reason are a likely invitation to tax audit.
  1. High income: Since the audit of high-income taxpayers is projected to generate more tax revenues as compared to the audit of low-income taxpayers. Therefore, this category is usually an easy target for the tax authorities. 
  1. Specific professions: There are certain professions that generate tax income like waiters and taxi drivers. Therefore, the taxpayers belonging to this category are more prone to a tax audit. Likewise, self-employed individuals are also expected to possess unreported cash income and are thus a target for tax audit.
  1. Failure to prepare tax returns: Problems in preparation of your tax returns may lead to an audit.
  1. Related party transactions: Taxpayers whose family members are involved in financial operations are expected to be examined by the tax authorities.
Consequently, it is a twofold defense strategy against a tax audit. Firstly, you must be ready with all the supporting documentations for credits and deductions. Secondly, consult your accountant immediately after receiving the notification of an audit.