What increases your chance of being audited?

Question

What increases your chances of being audited? Having a home office? Small business?

what decreases your chances? Does hiring an accountant do your taxes makes it look more credible to IRS agents?

Answer 1

Here is an article that claims to know something about it. Here are a selection of quotes:

The IRS says there are several ways a return can be selected for audit and the first is via the agency's computer-scoring system known as Discriminant Information Function, or DIF. The IRS evaluates tax returns based on IRS formulas, and DIF is based on deductions, credits and exemptions with norms for taxpayers in each of the income brackets. The actual scoring formula to determine which tax returns are most likely to be in error is a closely guarded secret. But Nath, a tax attorney in the Washington, D.C., area, says it's no mystery the system is designed to screen for returns that could put more money in the government Treasury.

So what is likely to trigger a discriminant information function red flag?

• Higher incomes.
• Income other than basic wages; for example, contract payments.
• Unreported income, such as investment returns.
• Home-based businesses, especially when in addition to salary income, and home-office deductions.
• Noncash charitable deductions.
• Large business meal and entertainment deductions.
• Excessive business auto usage.
• Losses from an activity that could be viewed as a hobby rather than a business.
• Large casualty losses.

Answer 2

Here's a few things:

• Mistakes in calculation or failure to file forms you need to file.
• Mismatches of data reported by employers and financial institutions.
• Undereporting of tip income
• Excessive/exaggerated deductions. (ie. Putting a logo on your car and deducting the trip to the supermarket is not a good idea.)
• Evidence that your lifestyle is not supportable by your income, especially if you are in a cash business like a waiter, tradesman, sales.
• Use of frequently abused deductions, like the home office deduction.
• Opening your mouth. Your friends can earn a significant commission for anonymously turning you in.