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Are You Above Average?

2/13/2017

 
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A common concern at tax time is whether all possible deductions are taken to reduce taxable income. In a previous blog post we talked about having higher-than average deductions and higher-than-average charitable contributions. Some people worry that taking too many deductions is a red flag, begging for an IRS audit.

​Should you reduce the deductions you claim to reduce audit concerns? NO! If you have legitimate deductions, claim them!
First, if you paid for it (deduction) or gave it away (charitable deduction), claim it! Don’t be afraid to report what actually happened.
 
Second, the IRS audit rates are extremely low, less than 1% for most people. The IRS tracks statistical data for returns to compare each individual return against a composite of everyone’s returns. Suppose your deductions are outside the statistical norm. Will that increase your chances for an audit? Probably. But even if your audit risk doubles, it is still extremely low.
 
If your income and deductions catch the attention of the IRS, then what? Most likely you will get an automated letter from the IRS asking you to substantiate the deductions you took. You respond to the letter with the documents supporting your claimed deduction. In most cases that’s the end. You’ve answered the IRS’s question, proven the deduction you claimed, and – don’t forget – got a nice little tax deduction too.
 
We understand the perception most people have about audits, and the drama and chaos they bring. Most of the time that is an exaggeration. We don’t want to appear cavalier about people’s concerns about an audit. But more importantly we don’t want people to give away tax dollars because of fear of taking a legitimate deduction.
 
If you want to know more, there is a wealth of information at the IRS Tax Statistics page and IRS SOI (Statistics of Income) page. If you have questions about that data or would like to ask us about anything else call us at 435-275-8400.

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