Taxation & Estate Planning

Circumstances That May Trigger an Audit

By Darrin Mish

With IRS Problems in your past, the last thing you want to do is undergo an audit whether it is a correspondence audit or a face-to-face audit.  The IRS has specific situations that alert it to scrutinize certain taxpayers.  Its criteria for audit selection are not available to the general public but from experience and testimony, reliable information regarding these specific situations has been identified.       

Common Situations That Alert the IRS

•    Income from self-employment – easier to conceal income by underreporting and taking excessive deductions for expenses
•    Using independent contractors – uncertainty if worker is an employee or an independent contractor
•    Owning interest in a small business or partnership – if business is audited and shows increase in taxable income, each individual owner might be audited
•    Dealer showing income from investments in what they sell – Dealers in goods, commodities, realty, securities or other items held as investments
•    Deducting business losses – Cannot deduct net losses from hobbies
•    In-home office deductions – Area in home must be used exclusively for business
•    Bartering – Must report fair market value of items they barter for
•    Taking abnormally large itemized deductions – Itemized deductions exceed 35% of adjusted gross income
•    Income exceeding $100,000 – More cost effective for IRS to audit these returns
•    Past audits with deficiencies – Taxpayer has a history of inaccurate returns
•    Claiming losses from tax shelters – Investment schemes that generate losses
•    Tax return includes alimony and claims someone who does not live with them – Complex rules and most taxpayers fail to qualify

Some of these circumstances are obviously beyond your control.  It is important, however, to take note of them when you are considering changing professions or claiming deductions.  If you are involved in any of these situations, it is important to keep meticulous records.  It is also important to meet all the criteria when taking deductions.  This does not mean you should hesitate to take the deductions you are entitled to though. 

Even if you are not in any of the above categories, just the fact that you make a mathematical error on your tax return gives the IRS a reason to examine it closer. 

If your IRS Problems involve any of the above criteria, now is the time to review your financial situation.  Contact our office for assistance.  Our knowledgeable staff will answer any questions you have and help you resolve any of your IRS Problems.  Call us today.

Full post as published by IRS Problem Solver Blog on March 19, 2008 (boomark / email).