5 IRS Audit Red Flags

You may have done nothing wrong. But the prospect of an IRS audit makes everyone sweat.

Many things probably go through your mind as you’re preparing a tax return or looking at one that’s been completed for you. Did I declare all of my income? Are all of the deductions I claimed legitimate? Do I have the required background documentation in case I get audited?

Even if everything is in order, you may still be selected for additional scrutiny by the IRS. Some IRS audits are entirely random. You may be chosen as the result of computer screening or based on a statistical formula. Other triggers include:

  • Document matching (the information on your W-2s and/or 1099s doesn’t match what’s reported on the actual return), and,
  • Related examinations (if you have business partners or investors, for example, who were selected to be audited, you may also be subject because of your relationship).

TaxPlan 0516 image 1_zpsabcpt7ts5 Triggers

There’s no way to ensure that you’ll never be audited by the IRS. But some tax-related scenarios may make it more likely that you’ll get that official letter in the mail, like:

Your income is high. This is a good thing, right? Yes. But the more you make, the greater the likelihood of an audit. This is clear when you look at the most recent data available, as reported in the Internal Revenue Service Data Book 2014. 0.86 percent of all returns filed were “examined” in 2014, to use the IRS language.

0.53 percent of taxpayers who claimed an Adjusted Gross Income (AGI) of between $50,000-75,000 were looked at. That percentage jumped to 1.75 if you made between $200,000 and $500,000. If you made a million but less than $5 million, that percentage increased to 6.21. And 10 million or more? 16.22 percent of those taxpayers were tapped for examinations.

TaxPlan 0516 image 2_zpsvj7kpgysYou’re self-employed. Claiming a loss if you work for yourself can increase your chances of being audited. According to the IRS materials referenced above, only 0.93 percent of taxpayers who had AGIs of $1.00-25,000 had post-filing sessions with the agencies. But of those who had an AGI of zero—or less than zero—5.26 percent were audited.

Why? The Schedule C. The IRS knows that some self-employed people either don’t report all of their income or exaggerate their deductions – or both. Some may also blur the distinction between a business and a hobby, which the IRS can choose to scrutinize.

You’ve claimed excessive deductions. Two areas where this sometimes occurs are charitable deductions and medical expenses. You must have pristine records to claim either. So if you have a year when you’ve been especially generous or especially unhealthy, take special care to assemble and store all of your documentation, just in case.

There are other deductions that may raise an eyebrow at the IRS if their dollar amounts seem higher than they should. Do take any deductions that you’re entitled to, but know that the IRS might want to look at your return more closely.

You forgot to report some of your taxable income. If you’ve received forms from institutions reporting on the income they supplied to you, the IRS was also notified. Go through your paper mail more carefully than usual in January and February; some will probably say something like Important Tax Information Enclosed. Start a folder for the forms that come in and keep it in a safe place.

TaxPlan 0516 image 3_zps6ncnnztcIf you’re using an accounting application, it will be easier to run reports and compare your data to the forms you’ve received. If you’re not, and you have multiple income streams, we’d be happy to help you explore all of the areas where you might have received money. (We can also look for deductions you might have missed and handle all of your tax preparation.)

You neglected to report (and pay) the penalty on early distributions from retirement accounts. There are situations where the IRS will grant an exception to a withdrawal from a 401(k) or IRA before age 59-1/2. If you don’t qualify for one, the 10 percent penalty is mandatory.

It’s much easier to do everything you can to avoid an audit than to have to go through the stress-inducing process. Let us know if you want our assistance when it’s time to start preparing.

About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today's small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it. Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission. Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations. She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.
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