IRS tax audit triggers – IRS red flags
With tax season underway, many taxpayers are starting to gear up in preparation of their tax returns. Some are starting early in hopes of a substantial tax refund. Many other taxpayers will procrastinate due to having to owe the federal government. One thing is for certain, all taxpayers want to avoid these IRS tax audit triggers at all costs.
Many think IRS tax audits are quite common, but they actually are not. Less than 1 % of all returns were audited in 2015. Unfortunately, the IRS does not have an exact list of automatic tax audit triggers, but we certainly should be aware of certain scenarios. Here are the 6 biggest IRS tax audit triggers.
1. Failure to report all income from all sources. An audit is certainly triggered when income from all sources are not reported on your tax return. But, how will the IRS know, you ask? Income is reported to the IRS whenever you receive a W-2 or 1099 from a business.
And just because you do not have a W-2 or 1099 does not mean you do not have to report this income. You must be vigilant in obtaining these forms and contact your employers or business owners to obtain them. Keeping your address updated is always smart to ensure receipt of these very important tax documents during tax time.
Also, if an error is found on an income form, be sure to correct it with the business who will then correct it with the IRS. If it is not corrected, the IRS will only go off of the information that was reported to them.
2. Your business operated at a loss or had substantial or disproportionate business deductions. Unfortunately, Schedule C filers are targets because it is all too easy to abuse certain business tax deductions. There is a high probability that a tax audit will be triggered if your business deductions are disproportionately large compared to your income from your business.
If this is the case and all deductions are accurate, make sure you have all substantiations for the deduction(s) taken. Additionally, a tax audit will almost always be triggered when you are operating at a loss for more than three years or more.
3. You had substantial charitable deductions. Just as with business deductions, if they are disproportionately large as compared to your income, they will be suspect. Make sure to keep detailed records of your cash and property contributions.
4. You failed to report your foreign accounts. If you do not report your overseas accounts, you may face severe IRS penalties and an IRS tax audit.
FinCEN Form 114 (“FBAR”) is due by April 15th to report any foreign accounts with an extension available to October 15. It applies to: Any U.S. person, whether an individual or an entity, with a financial interest in or signature authority over one or more foreign bank or financial accounts must file an FBAR when the aggregate value of the accounts exceeds $10,000 at any time during the year.
5. You took rental property losses. The IRS is extremely tough on taxpayers claiming to be real estate professionals. In order to fully deduct these losses, you must be a real estate professional or be an active participant in the renting of your property. To be exact, real estate professionals must materially participate in real estate with over 750 hours each year and spend more than 50% of their working hours in real estate. These types of losses are heavily scrutinized by the IRS, and the rules to take them are quite strict. Be sure you qualify. Better yet, hire a tax attorney to make sure you do.
In the case that you are not a real estate professional or if you do not qualify, you may deduct up to $25,000 of property loss, which starts to phase out once your income reaches $100,000.
6. You earned more than one million. According to the Internal Revenue Service Data Book 2015, returns with income of $100k to $199k were audited at a rate of .64% versus returns with income of $1 million to $5 million being audited at a much higher rate of 8.42%. So, if you make more than one million, you pretty much have a target on your back.
Protect yourself and hire a tax attorney if facing an IRS tax audit. Arming yourself with a tax lawyer provides immense reassurance that you are fully represented by someone with the knowledge and ability to analyze the many complexities in the tax law. There are several options to consider if you come up with tax debt, including an IRS installment agreement or an offer in compromise.
The Los Angeles Tax Attorneys at Delia Law have many years of tax resolution experience and will competently represent you before the IRS. Please call for a no-cost tax attorney consultation at (310) 494-0100. We look forward to helping you.
This blog post is not intended as legal advice and should be considered general information about IRS Tax audit triggers only