A new analysis of 2014 tax returns found that taxpayers living in Vermont and California had a higher risk of an IRS audit than those who reside in other states, while Hawaii and New York residents faced a greater chance of an audit of their 2014 state tax return.
TaxAudit.com, a firm that specializes in tax audit representation services, analyzed 1.5 million US tax returns for the 2014 tax year for its second annual study of the states with the highest chance of a tax audit. The rankings are based on the percentage of 2014 TaxAudit.com Audit Defense users who were audited in 2015.
The 10 states with the highest likelihood of an IRS audit are:
- New York
- New Jersey
- New Hampshire
The 10 states (including the District of Columbia) with the highest likelihood of a state audit are:
- New York
- New Jersey
- District of Columbia
Taxpayers in Oklahoma were the least likely to be audited by the IRS, while Texas residents had the lowest chance of a state audit, the analysis found.
California and Colorado topped the list of the states with the most IRS audits for the 2013 tax year, while New York and Massachusetts had the highest likelihood of a state audit, according to TaxAudit.com’s inaugural study, released in April 2015.
Dave Du Val, EA, vice president of customer advocacy at TaxAudit.com, talked to the website The Motley Fool about why certain states have a greater risk of an IRS audit.
“When you ask why the IRS audits rich people, the answer is … because that’s where the money is. In 2014, as an example, the IRS audited more than 16 percent of income tax returns that reported more than $10 million in income. In general, more money means more audits, but even taxpayers with less than $25,000 get audited, and this is often due to refundable credits.”
Du Val also noted that moving expenses is one possible reason why the state audit rate in Hawaii is so high.
“The IRS allows taxpayers to write off expenses incurred during a work-related move, and moving to Hawaii is especially expensive,” he told The Motley Fool.
Du Val provided AccountingWEB with the following five red flags that could trigger an IRS audit:
1.Business income and expenses. The IRS is always on the lookout for both unreported income and high expenses. Self-preparers should be cautious of accidental duplication of employee and self-employed business expenses, and of taking losses on activities that could appear to the IRS to be due to a hobby rather than a for-profit business activity.
2. Itemized deductions. The IRS loves to pounce on people who report high itemized deductions, especially for charitable contributions and employee business expenses. It’s fine to claim these deductions for your actual qualifying unreimbursed expenses, but make sure you have your documentation on hand before you file your tax return.
3.Rental property. Tax returns with what appear to be inflated rental expenses are frequently caught in the IRS net. Some of the deductions on the Schedule E, where the income and expenses for rentals are reported, can be easily misinterpreted. Those who prepare their own tax returns should take the time to understand the deductions they are claiming. Not knowing the difference between a deductible expense and one that must be capitalized over a number of years could result in disaster in an audit. Also, the rules to be considered a “real estate professional” are sometimes not clear.
4.Earned Income Tax Credit. The Earned Income Tax Credit is generally available to parents earning below a minimum income and caring for dependent children. Returns that include claims for the credit are twice as likely to be audited due to the high number of fraudulent claims, according to a recent report by the US Treasury inspector general. Those who claim the credit should be prepared to prove their eligibility, making sure they have all of the proper documents needed to prove they meet all of the tests.
5.Filing status and dependency issues. When two people claim the same dependent, the IRS gets involved. Although separated and divorced parents who have custody have the clear advantage, they still have to prove everything by providing birth certificates, school records, and more. Those who file using the head of household filing status are often questioned, as well.
About Jason Bramwell
Jason Bramwell is a staff writer and editor for AccountingWEB. He has nearly 20 years of experience in print and online media as a journalist and editor.