Speaking of the uber-rich, another factor that ups your chances of getting audited is earning a high income. The IRS knows that the big money is with the big earners, which is why only 1% of overall taxpayers were audited in 2011, compared to 30% of those earning $10 million or more.
Big expenses are another common reason for an audit. There’s an old saying at the IRS: “Look at T & E and out by 3.” Travel and entertainment expenses are potential audit triggers because they blur the line between business and personal. Claiming a large amount of travel and meals as business deductions means you need to keep detailed records that document the amount, the place, the people attending, the business purpose and the nature of the meetings, down to what you talked about.
In that same vein, the home office deduction is often abused, and the IRS has cracked down. You can’t say your living room is a home office because you occasionally check your work email from the couch. The IRS says the room must be for work and work only to qualify.
You can’t mess with the IRS!
One final way to request an audit from the IRS is to make unusually large charitable contributions. Be as generous as you like, but know that it will raise suspicion if your donations are higher than average within your tax bracket, and be sure to obtain all the proper documentation to back up your deductions.
Okay, so what if we follow all of your advice and manage to get audited, what then?
It’s a dreaded event, but it’s survivable. The vast majority of audits are by mail, and if you’re prepared, honest and organized, you’ll be just fine.
Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.