How likely is it that you'll get audited?

- Back in 1963, when the Singing Nun dominated the pop charts, nearly 6% of Americans were audited. More than 50 years later, less than 1% of returns are audited, and the numbers are predicted to decrease further as the IRS workload increases, and the IRS workforce decreases. At the same time, IRS computers are getting better at spotting mistakes. Based on its computer findings, the IRS sends out approximately 5,000,000 AUR, Automated Under Reported notices a year, and initiates over a million desk audits, audits that are completed by correspondence. Field audits, where you meet with the IRS, are triggered by a system known as DIF, Discriminate Function. DIF is a method of flagging returns with a higher probability of errors, unreported income, or over-inflated deductions. After the DIF program flags your return, an IRS examiner manually examines it to determine if you merit an audit. Keep in mind that just because something may trigger an audit, doesn't mean you should be discouraged from claiming legitimate deductions or declaring losses. Complete your return honestly and diligently, and be prepared to back up any of your claims. The following DIF factors are likely to result in audit flags. Just being a self-employed musician. How does the IRS computer know that you're a musician? By looking at the industry code provided on your Schedule C, Code 711510, independent artists, writers, and performers. Failing to report or under-reporting music income. IRS computers are programmed to uncover discrepancies between income reported on your return, as compared to what's reported to the IRS. For example, you reported $1,000 income from a booking agent, but your 1099 from the agent indicates $1,500 income. These are serious IRS flags, because it's a crime to deliberately fail to report income. Continuous annual losses, or claiming music as a business when it is a hobby. The IRS computers may flag your return if you have a loss from your music business for more than three out of five consecutive years. Music deductions equal a large proportion of income. For example, if your tax return shows that you earned $25,000 in music income, you're more likely to be audited if you claim $20,000 in deductions than if you claimed $2,000. In other words, viewed as a ratio, the larger the proportion of deductions to income, the greater the chances for an audit flag. And speaking of deductions, certain deductions, for example, auto, travel, and entertainment expenses, even though they're common for musicians, may trigger flags by IRS computers. Similarly, a music business with a home studio or a home office deduction is more likely to be flagged, especially if your music business is claiming a loss. Using a "marked" tax preparation service. If the person who prepared your taxes has a poor reputation with the IRS, for example, the individual has been associated with false returns or engaged in dubious tax strategies on behalf of clients, that may also trigger audit flags. Note: a small number of field audits are not triggered by DIF factors, they are completely random, and not based on a suspected error. The IRS supposedly uses random auditing as a deterrent, and as a means of revising its audit standards.