IRS Audits – What are they looking for?
By Steven A Leahy
The IRS calls an audit an “Examination of Returns.” The IRS accepts most federal tax returns just as they are filed. Some returns, however, are selected for review. The IRS selects returns for audit by computerized screening, random sample, or by an income document matching program. An examination can take place in several ways. Some audits are handled exclusively by US Mail, in the taxpayer’s home or place of business, at an IRS office or at your representative’s office. The time, place, and manner of the audit are negotiable.
Here are nine “red flags” the IRS uses to select a return to audit:
1. Make a mistake on your tax return – Gross errors will bring immediate scrutiny to your return and cause the IRS to audit your return. Simple math errors, not signing a paper return, leaving off or incorrectly listing your social security number are common ways to invite IRS scrutiny.
2. Round off the entries on your tax form – Generally, life doesn’t happen in round numbers. If you use round numbers, it tells the IRS that the numbers may be fictitious, or at least not accurate.
3. File late, or not at all – When you file late, the return is not processed with the hoard of annual filers. Instead, your return will be processed by a person, looking at the details of your return.
4. Be a Tax Protester – Tax protesters don’t believe the IRS has legitimate authority to collect taxes and they thumb their nose at the IRS by filing returns that indicate zero tax owed (if a tax protester files a return at all). Tax protestors can count on the IRS assigning a revenue agent to review it.
5. Have unreported Foreign accounts – Foreign banks have been reporting American account holders to the IRS for some time now. So, even if you don’t report the foreign account, you can be assured that the foreign financial institution will.
6. Don’t report some income – Companies are to issue a 1099 for any payments over $600.00 or W-2s to employees. So, if you don’t report some income, the company that paid you will likely report the payment in a 1099 or W-2 and the IRS will have the paperwork to match against your return.
7. Claim large charitable contributions – This is an easy target for the IRS. The IRS can simply audit you by mail and ask for substantiation for all deductions.
8. Take a repeated loss on a home based business – If a business loses money for 3 out of 5 years, the IRS considers that activity to be a hobby, not a business. If it is a hobby, you can only deduct losses equal to or less than income. You can’t use the losses in a hobby to offset taxes from other income.
9. Use an unscrupulous tax preparer – When the IRS notices a specific tax preparer is preparing returns that generate large refunds the IRS is likely to audit ALL the taxpayers who used that tax preparer. So, be careful whom you hire.
Generally, the IRS has three years from the due date to audit a return. That explains why the IRS will usually conduct an audit for three consecutive years, rather than just one. There are exceptions to the three year rule. For example, if you underreport your income by more than twenty-five percent, the IRS has six years to audit. And, if a taxpayer files a fraudulent or false return, there isn’t a time limit on an audit.
So, if you are facing an IRS audit, or have already been audited, you should work with a local law firm that will work to get you through the audit process and collections in the best way possible. You should give me a call – Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.