Tax Law

Remove the Red Flags: How to Avoid an IRS Audit

An IRS audit strikes fear into every American that endures the frustration of completing complicated federal income tax forms. Never mind that the 5th Amendment to the Constitution prohibits self-incrimination. The IRS will come after you if you fail to submit accurate income tax forms.

Some taxpayers believe the IRS performs audits based on which way the wind blows. However, the tax collection agency looks for red flags that range from making simple math errors to knowingly trying to defraud the government by shielding income from taxation.

Here are some frequent red flags that can lead to an IRS audit:

Making Math Errors

As the most common trigger for IRS audits, math errors represent the easiest red flag to correct. The IRS does not buy the argument that simple math errors should go unpunished. In fact, the agency does not care why you failed to pay your fair share of taxes. Review your completed tax form several times to verify you have made accurate math calculations. Tax software programs such as Turbo Tax are excellent tools to alert you to tax form math errors. Even better, consult with a licensed tax attorney to ensure your tax return is IRS compliant.

Leaving Out Income

Many taxpayers earn income from supplemental jobs. The supplemental income helps defray living expenses or allows you to save money for a family vacation. Many of us receive cash for working secondary jobs and the IRS wants you to account for every last penny earned. The omission of a small amount of income can trigger an IRS audit. Interest from bonds and dividends generated from socks represent two small sources of income that some taxpayers refuse to report as income. Americans that make more than $100,000 per year fall under the IRS income microscope. However, the IRS is known to go after corner lemonade stands to receive its fair share of the income pie.

No More Three Martini Lunches

The IRS abolished business deductions for lunches years ago, but that has not stopped some taxpayers from claiming bogus business deductions of their tax returns. If you use business funds to pay for personal expenses, you better not report that the funds were used for business expenses. The IRS will come after you like you are Al Capone claiming his bootlegging expenses paid for legitimate business costs.

Claiming You Are Self-Employed

If you file the self-employed Schedule C form for personal income taxes, you can expect a knock on the front door from the IRS. This is easy to spot red flag for the IRS involves hiding income by making it appear as a business loss. The IRS looks hard to detect Schedule C forms that display losses. Never claim personal expenses as business expenses.

Targeted Tax Returns

The IRS searches for fraudulent tax returns by taxpayers that claim self-employment, run small businesses, and earn over $100,000 a year. Taxpayers that file returns that are outside of the boundaries for people with similar incomes, locations, and professions also have to worry about an IRS audit. One extreme example is a physician who works for the rich and famous of Hollywood and declares income of $30,000.

Beware the Whistleblower

The IRS encourages tips from anonymous sources to nail Americas for tax fraud. If you plan to defraud the tax collection agency, make sure you never share your plans with anyone else, including a spouse that can use the information against you after your marriage goes south.

Some of the red flags that trigger an IRS audit simply cannot be helped. We all make math errors and put the wrong numbers in the wrong tax form spaces. To void incurring the wrath of the taxman, contact a licensed attorney that specializes in tax law. Ask for a free initial consultation to see where you stand with the IRS.

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