Short of $$$ and short of staff, the number of tax returns examined by the IRS has dropped to just 0.5% of all returns — but that still means over a million taxpayers will be singled out for review.
Most folks are honest when it comes to filing their returns but some do “fudge” a bit, some may just make careless mathematical errors, even so there are several factors that make you an attractive target for an IRS audit: income levels especially of $1 Million or more, the types of deductions or losses you claim, the business you’re engaged in, and whether you own foreign assets.
There are no guarantees in life, especially when it involves the IRS, but we can promise that in addition to the items mentioned above, these are the red flags that will draw the IRS’s attention to a return:
- Failing to report income
- Larger than average deductions, especially charitable deductions, or those for business travel/meals/entertainment
- Higher grossing sole proprietorships
- Businesses that are cash intensive
- S-corporations where owner compensation appears low
- Business owners that report substantial net loss
- Claiming rental real estate losses
- Deducting alimony but not satisfying the requirements, inconsistent alimony reporting
- Writing off losses from a hobby
- Failing to report a foreign bank account
- Early payouts from your IRA or 401(k)
- Claiming day-trading losses on Schedule C
- Gambling activity – either failing to report winnings or claiming big losses
- Taking the home office deduction
- Large transactions in currency of $10,000 or more
- Claiming the Foreign Earned Income Exclusion
There are some myths we would like to dispel – these will most likely NOT trigger an audit:
- Amending a return
- Filing an extension
- Taking legitimate deductions
So, does using a reputable accounting firm lower your chances of being audited? You bet! A highly experienced accountant keeps current with IRS rules and regulations, can help minimize your tax bill, and will prepare your returns in a manner that discourages IRS audits. If you are not already a Fuoco client – you should be!
