Avoiding Unwanted Attention from the IRS – What to keep in Mind
Many times the IRS chooses some tax returns at random, which is why there is no way to completely avoid being audited. Of course, the only reason filers should worry about an audit is if they are fudging on their taxes. Although math errors may draw IRS inquiry, they rarely lead to a full-blown examination by the IRS. While there is no sure way of avoiding an IRS audit, following some basic tips may help you avoid raising certain red flags.
Usually the overall individual audit rate is very negligible, but the odds increase as your income goes up. Taxpayers that make more money tend to take more itemized deductions, including thecharitable deduction, or are small businesses filing a schedule C. This tends to attract the attention of the IRS. It's important to understand that the more income shown on your return will indicate a likely call from the IRS.
As the IRS receives copies of all 1099s and W-2s, ensure you report this income. A mismatch sends up a red flag; so you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.
Charitable contributions are a great write-off. But if you're charitable deductions are disproportionately large compared with your income, it raises a red flag. The IRS is aware of the usual charitable donation for people with similar income.
Underreporting of income and overstating of deductions are mainly done by self-employed people. The IRS usually looks at both higher-grossing sole proprietorships and smaller ones, and most of the big deductions for meals, travel and entertainment always attract an audit.
Claiming 100% business use of an automobile is always a red flag for IRS agents. IRS agents are trained to focus on this issue and will scrutinize your records, so it is important to maintain detailed mileage logs and precise calendar entries for the purpose of every road trip.
Most of the small business owners are cash-intensive businesses, like taxis, car washes, bars, hair salons, restaurants, etc. These are a tempting target for IRS auditors, mainly as it is found that those who receive primarily cash are less likely to accurately report all of their taxable income.
The IRS is extremely interested in people with money stashed outside the U.S., particularly those in tax havens, and tax authorities have had success getting foreign banks to disclose account information.
Reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts go to the IRS. If you make large cash purchases or deposits, be prepared for IRS scrutiny.
To effectively deal with tax-related matters, it may be prudent to hire a tax professional. They have the necessary knowledge and expertise to offer advice about all tax related issues and can offer tips on tax planning strategies while also offering guidance on issues like Fbar Electronic Filing, etc.
- Sudden income increase
Usually the overall individual audit rate is very negligible, but the odds increase as your income goes up. Taxpayers that make more money tend to take more itemized deductions, including thecharitable deduction, or are small businesses filing a schedule C. This tends to attract the attention of the IRS. It's important to understand that the more income shown on your return will indicate a likely call from the IRS.
- Not Reporting All Taxable Income
As the IRS receives copies of all 1099s and W-2s, ensure you report this income. A mismatch sends up a red flag; so you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.
- Taking Large Charitable Deductions
Charitable contributions are a great write-off. But if you're charitable deductions are disproportionately large compared with your income, it raises a red flag. The IRS is aware of the usual charitable donation for people with similar income.
- Deducting Business Meals, Travel and Entertainment
Underreporting of income and overstating of deductions are mainly done by self-employed people. The IRS usually looks at both higher-grossing sole proprietorships and smaller ones, and most of the big deductions for meals, travel and entertainment always attract an audit.
- Claiming 100% Business Use of a Vehicle
Claiming 100% business use of an automobile is always a red flag for IRS agents. IRS agents are trained to focus on this issue and will scrutinize your records, so it is important to maintain detailed mileage logs and precise calendar entries for the purpose of every road trip.
- Running a Small Business
Most of the small business owners are cash-intensive businesses, like taxis, car washes, bars, hair salons, restaurants, etc. These are a tempting target for IRS auditors, mainly as it is found that those who receive primarily cash are less likely to accurately report all of their taxable income.
- Not Reporting a Foreign Bank Account
The IRS is extremely interested in people with money stashed outside the U.S., particularly those in tax havens, and tax authorities have had success getting foreign banks to disclose account information.
- Engaging in Currency Transactions
Reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts go to the IRS. If you make large cash purchases or deposits, be prepared for IRS scrutiny.
To effectively deal with tax-related matters, it may be prudent to hire a tax professional. They have the necessary knowledge and expertise to offer advice about all tax related issues and can offer tips on tax planning strategies while also offering guidance on issues like Fbar Electronic Filing, etc.
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