Factors that increase your risk of being audited

The odds are in your favor that you won’t get audited by the IRS, but don’t get cocky and cheat. The agency has tools at its disposal to catch errors and outright tax scofflaws.

Audits were down almost 16 percent in 2016 compared to the previous year. Just over 1 million individual income tax returns received the extra scrutiny last year, the lowest number since 2004, according to the IRS.

I asked some members of the California Society of Certified Public Accountants about the impact of the decrease in audits. Here are things that they said could increase the chances that your return will be audited:

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“The IRS makes a cost/benefit decision in regards to audits,” said CPA Mitchell Freedman. “So, they follow the money. If you make over $1 million per year, there’s a pretty good chance you will be audited. If you make more than $200,000 per year, you have close to a 2 percent chance of being audited.”

If you report any business or self-employment income on a Schedule C, you are more likely to be audited than a salaried individual, Freedman said.

■ Failing to report all your income. “While audits in general have declined over time, additional reporting by various areas of the financial world have allowed for more matching of documents,” points out Janet Lee Krochman, a CPA from Costa Mesa, California.

For example, the IRS has the ability to compare what your ex-spouse paid (and deducted) in alimony to what you reported as income from alimony, said CPA Andrew Porter.

■ Forgetting that others are sending the IRS information about your tax situation. The IRS has several different types of audits. The most basic is called “automated underreporter,” or “AUR.” This type of audit is done completely by computer, according to CPA Mary Kay Foss. The IRS computer compares the 1099s (freelance income), W-2s (wages) and 1098s (mortgage interest) it receives with the returns. “Anyone with many sources of income that are reported on those tax forms is a likely target,” Foss said.

If you’re a taxpayer with a pricey home, be sure you report the correct amount of mortgage interest. “The IRS has been receiving mortgage loan balances in an effort to ensure that taxpayers are properly reporting,” said Gregg R. Wind, a CPA in Los Angeles.

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In such cases, the IRS wants to make sure that yours is a viable business and not an excuse to deduct expenses in connection with a hobby, Foss said.

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The IRS looks for cheaters who inflate deductions, such as the value of goods donated to charities, the amount of unreimbursed business expenses and medical expenses, Foss said.

Still, there are folks who will tempt fate.

Don’t risk an audit. My motto is: Never mess with the IRS.