There are certain red flags in a tax return that will draw scrutiny by the IRS. Audits can occur by mail or before an IRS agent at a taxpayer's places of business. An Audit, though unpleasant for any taxpayer, may be unavoidable, such as when you must claim increased business expenses or a significant increase in income. Other taxpayer claims and deductions, even if made by innocent mistake or due to simple ignorance of the tax law, can get you into hot water with the IRS. A common mistake that business owners and individual taxpayers make is attempting to respond to or appear before an IRS Audit without the support or advice of a knowledgeable tax professional. The good news, however, is that even if the IRS has completed an Audit and Assessment against you, we can still assist with filing an Appeal or Audit Reconsideration to defend business or medical expenses or legitimate increases in income.
Top IRS Red Flags That Will Trigger an Audit
The top IRS Red Flags that may trigger an Audit from the IRS include, but are not limited to:
1. Not Reporting All of Your Taxable Income. It is easy to overlook old brokerage accounts and capital gains, forgotten W2s or 1099s, or earned interest and dividends.
2. Failing to Report Foreign Accounts. The Foreign Account Tax Compliance Act has strict reporting requirements for foreign bank accounts. The law requires electronically filing FinCEN Form 114 to report foreign accounts that total more than $10,000 at any time during the previous year. And those with a lot more financial assets abroad may also have to attach IRS Form 8938 to their timely filed tax returns. The law additionally requires individuals to report foreign assets worth at least $50,000 on the new Form 8938. The Taxpayer must identify the institution and the highest dollar amount the account was at the previous year."
3. Questionable Business Expenses. Excess business tax deductions that "exceed the occupational norm" will alert the IRS for a potential Audit. Additionally, commingling personal and business expenses may invite an Audit by the IRS. 4.
4. Earning More than $200,000. On average, very few people get audited by the IRS. However, for people with incomes over $200,000, the Audit rate is almost 4 times higher than the rate for the national average income earners. Taxpayers with higher incomes typically have more complex returns raising more scrutiny from the IRS.
5. Math Errors. The IRS uses an automated computer system that will automatically place an alert as to your matter error.
6. Unreported Cash Exchanges. If you earn income from jobs where a significant amount of unreported cash changes hands, such as restaurant staff, bar tenders, salon workers, and other service industry employees, these professions may garner more attention to alert a potential IRS Audit.
7. Third Party Referrals. An Audit may be performed based on information obtained during the Audit of a third party, or because of a referral from other government organizations, including the military if you earned income as a current or former federal employee. If you're in the middle of a divorce, an estranged spouse or family members may share information with the IRS, including estranged spouses seeking leverage in a family law dispute.
8. Making Unusually High Charitable Deductions. Charitable donations that don't conform to expected values for your income level may prompt an Audit.
9. Claiming the Earned Income Tax Credit. According to past IRS decisions, those that claim the Earned Income Tax Credit are twice as likely to be audited. According to the Wall Street Journal, "improper claims" of this credit cost the government over $10 billion a year.
10. You Own a Business or are Self-Employed. In some cases, the IRS may pay extra attention to Taxpayers at reporting businesses on Schedule C forms because there's more room for dishonesty, including skimming profits, or mathematical errors. Recognizing your business as a corporation or partnership, in which case you're not required to file a Schedule C, instead of a sole proprietorship, may prove beneficial to avoiding a potential audit.
11. Claiming Business Use of a Vehicle. Very few taxpayers can legitimately claim complete business use of a car they own or lease, and be sure to keep good and thorough receipts to substantiate business use of a vehicle.
12. Participating in Aggressive or High Risk Tax Strategies.