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Tax and Tax Information - Tax Audits Advise
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Advice on Internal Revenue Service Audits
It is important to keep in mind that the IRS computer system selects the returns that are audited, not human employees.
The computer system selects returns that are likely to yield the most money to the government and then are merely reviewed by an IRS agent. The computer system makes this decision by reviewing returns for “red flag” characteristics. Red flag characteristics are those income, deduction, and credit types that have historically seen the most imprecise calculations and abuse by taxpayers. Below is a list of common red flags their computer systems look for.
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None wage sources of income
A taxpayer is more likely to get audited if he or she generates income from any source other than regular employment wages. Persons who file Form 1099 are up to three times more likely to receive an audit then some one who only files Form 1040. A 1997 IRS press release claimed more then three percent of taxpayers filing Form 1099 reporting between $25,000 and $50,000 of income were audited, compared with under one percent of 1040 returns that were audited.
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Taking excessive deductions or credits
Although the IRS offers hundreds of possible deductions and credits to help taxpayers lower their income tax liability, taking an excessively large amount will send a very clear red flag to the IRS. But how does a taxpayer know what’s excessive? That’s a tricky question. There is no all-applying rule because the IRS determines the allowable number of deductions for a taxpayer mostly based on their income. For example, if a person making $30,000 per year claims $15,000 in charitable contributions, then this will send a red flag to the IRS.
Improper self-employment deductions Although there are many tax laws allowing self-employed individuals to lower their liabilities by using home office deductions, taxpayers taking home office deductions are probably the most frequently contested by IRS because they are easy for a taxpayer to bend the truth on. In order to claim a home office deduction a taxpayer’s home office must be the principal place of business, meaning they perform most of their work in the home office. Also, the space must be used exclusively for running the business and not for personal use as well. Otherwise the space can’t be considered a home office and may not be deducted. The rules for home offices are very specific, so please be sure to read the IRS’s rules and regulations if your considering claiming a home office deduction. Excessive business losses Losses from a business can also be another red flag for the IRS. If an individual starts their own businesses for the purpose of generating excessive tax deductions, the IRS will catch on quickly. Businesses must be profitable in at least three of the past five years in order to be considered a legitimate business for tax purposes. Otherwise the IRS will realize the business is functioning as a tax shelter. Noticeable inconsistencies from previous years If there are big inconsistencies between your previous tax returns and your current return then you could be sending a red flag to the IRS. The most common examples are name changes (i.e. your name or the name of one of your dependents), claiming new deductions and credits, or a significant change in income. For example, if a taxpayer earned $75,000 one year, then only $15,000 the next, the IRS is going to wonder what happened. Different information in local and federal returns If there are differences in the income you reported to your state treasury and to the IRS then the IRS will investigate as to why the information reported is inconsistent. Not only do federal and state authorities receive records of all sources of income and financial information for every taxpayer, but the IRS does as well. If they notice any errors that point to misrepresentation of income then you can expect to receive a letter informing you of an audit. Suspiciously low income If your reported income seems suspiciously low for your given life style, then the IRS will see this inconsistency and may request an audit. Remember that the IRS has access to all your financial records and will notice if you are making a $5,000 monthly mortgage payment but only receiving $2,000 a month in reported wages. They are going to know you must be receiving income from another source and will investigate. Sloppy or incomplete tax returns If your tax returns are incomplete or sloppily prepared then this might also get the attention of the IRS. If there are blanks where there should be numbers or if most of the numbers you claim are round numbers (like $2,500 or $10,000) then this will also send up a red flag to the IRS. For over sixteen years, Roni Deutch has been recognized as an experienced tax attorney and founder of the nation's largest law firm dedicated to resolving IRS back taxes. Roni Deutch has always put the needs of her individual clients first, and by so doing has helped thousands of Americans find an end to their IRS tax nightmares. This experience, dedication and commitment to helping American taxpayers can now be found at the Roni Deutch Tax Center. What Other Authors say about Taxes
Deciding when to File a Tax Return?
by Keith Hoyng
April 15th - "The Day of Reckoning"! Every year, millions of Americans get ready to pay taxes to Uncle Sam, or get ready to collect a tax refund from Uncle Sam; when did this become the great day that... As Benjamin Franklin famously said, nothing is certain except death and taxes. But where do taxes come from, and do we really need them?
A History of Taxes
The first recorded use of taxation was... As we sit in the middle of winter, most people can't believe how high their utility bills are. Going with solar energy can lower your bills and you get a hefty tax creditSolar Tax CreditSolar energy is... The Internal Revenue Service unveiled a special new section for people who have lost their homes due to foreclosure. The IRS also reassured homeowners that, although mortgage workouts and foreclosures... When an individual passes, on the federal government imposes an estate tax. This estate tax only applies to estate properties that are over one million fifty thousand dollars. The federal government is... Now, here's a real savings to the individual taxpayer with children. The child tax credit is a direct tax credit that is available to provide credit to taxpayers with income below certain established levels.... Now is the best time to start thinking about your year end tax planning. These tax strategies can be put into effect by the end of the year and some as late as when the tax return is due. Planning now... When it comes to preparing our taxes, many of us could use some help. The following websites offer guidance and information that may assist you in learning about how to get the most out of filing your...
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Index of Articles about Taxes
What Other Authors say about Taxes
Deciding when to File a Tax Return?
by Keith Hoyng
April 15th - "The Day of Reckoning"! Every year, millions of Americans get ready to pay taxes to Uncle Sam, or get ready to collect a tax refund from Uncle Sam; when did this become the great day that... As Benjamin Franklin famously said, nothing is certain except death and taxes. But where do taxes come from, and do we really need them?
A History of Taxes
The first recorded use of taxation was... As we sit in the middle of winter, most people can't believe how high their utility bills are. Going with solar energy can lower your bills and you get a hefty tax creditSolar Tax CreditSolar energy is... The Internal Revenue Service unveiled a special new section for people who have lost their homes due to foreclosure. The IRS also reassured homeowners that, although mortgage workouts and foreclosures... When an individual passes, on the federal government imposes an estate tax. This estate tax only applies to estate properties that are over one million fifty thousand dollars. The federal government is... Now, here's a real savings to the individual taxpayer with children. The child tax credit is a direct tax credit that is available to provide credit to taxpayers with income below certain established levels.... Now is the best time to start thinking about your year end tax planning. These tax strategies can be put into effect by the end of the year and some as late as when the tax return is due. Planning now... When it comes to preparing our taxes, many of us could use some help. The following websites offer guidance and information that may assist you in learning about how to get the most out of filing your... |
