An IRS computer program generally decides which returns will be audited. This determination is made with a search for what are commonly called "Red Flags." The computer is looking at the return to detect variances from the national average in numerous categories of deductions.
Here are a few examples of Red Flags:
- Discrepancies between amounts on your return and what a third party reported to the IRS, such as how much mortgage interest you paid or how much 1099 income you received.
- Your Return is prepared by a return preparer known to be dishonest by the IRS.
- Divorced taxpayers both claim their children as dependents. Also, when an ex-husband reports paying alimony to his ex-wife, and the ex-wife fails to report all or part of the alimony, this can cause both returns to be audited.
- Your itemized deductions exceed 43% of your adjusted gross income.
- Schedule C business expenses exceed 64% of Schedule C gross receipts. (Just filing a Schedule C increases your chances of an audit by three hundred percent.)
- High Medical deductions.
- High charitable deductions or a large amount of non-cash charitable deductions.
- Losses from farming operations.
- Claiming un-reimbursed employee business expenses on Form 2106 and Schedule A.
- Excessive Casualty and Theft loss deductions.
- Unusually high losses on rental property that you own, Schedule E.
- Unusually high capital losses on Schedule D.