Top Eight Audit Flags
Essex & Associates:: www.essexinc.biz January 31, 2011
Ever wonder why some tax returns are audited by the IRS while most are ignored?
Well, there's a whole host of reasons to this age-old question. The IRS audits about 1.4 million returns out of 130 million filed every year.
The agency doesn't have enough personnel and resources to examine each and every tax return filed during a year. So the odds are pretty low that your return will be picked for an audit.
The chances of you being audited or otherwise hearing from the IRS can increase depending upon various factors.
Although there's no sure way to avoid an IRS audit, you should be aware of red flags that could increase your chance of drawing some unwanted attention from the IRS.
1. Failure to report all taxable income.
The IRS receives copies of all 1099s and W-2s that you receive during a year, so make sure that you report all required income on your tax return
2. Claiming large charitable deductions.
This comes up again and again because the IRS has found abuse on audit, especially with those taking larger deductions.
3. Business meals, travel and entertainment.
Schedule C is a treasure trove of tax deductions for self-employeds. But it's also a gold mine for IRS agents, who know from past experience that self-employeds tend to claim excessive deductions.
4. Claiming 100% business use of vehicle
Another area that is ripe for IRS review is use of a business vehicle.
5. Claiming a loss for a hobby activity.
Your chances of "winning" the audit lottery increase if you have income and file a Schedule C with large losses. And, if your Schedule C loss-generating activity sounds like a hobby…horse breeding, car racing, and such…the IRS pays even more attention.
6. Cash businesses.
Small business owners, especially those in cash-intensive businesses…taxi drivers, car washes, bars, hair salons, restaurants and the like…are an easy target for IRS auditors.
7. Math errors.
One of the biggest reasons that people receive a letter from the IRS is because of mathematical mistakes they make on their tax returns.
8. Taking higher-than-average deductions.
If deductions on your return are disproportionately large compared to your income, the IRS audit formulas take this into account when selecting returns for examination.
Take every legitimate tax deduction that you are so entitled. But, please keep good records.
Wishing you many happy returns,
Wayne T. Essex Ph.D.
Essex & Associates
Tax, Accounting, HR, Payroll
7501 Paragon Road
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