Avoiding an IRS Tax Audit: It is important to realize that receipt of an IRS Notice announcing that a tax return has been selected for an audit does not necessarily mean that there is an error on the return or that the IRS suspects the taxpayer or business submitting the return has done something dishonest. An IRS Audit is simply the process used by the IRS to verify the accuracy of a tax return by confirming specific items reported on the return. The audit process is always announced by an official IRS Notice which includes a list of the specific items of documentation being requested and a statement of the deadline by which these items must be provided.
Although the IRS selects tax returns for audit in a variety of ways, including random sampling, there are certain factors that increase the likelihood of a return being selected for further scrutiny. Several of these red flags are outlined below.
- Inaccuracies and Omissions
The IRS computer systems are very sophisticated and will pick up any number such as a social security number or a birth date that has been inaccurately recorded. In addition, the Agency receives copies of all 1099’s and W-2’s and will be alerted if the amounts reported on any of these forms are missing or listed incorrectly.
- High Income
Although earning a higher income is otherwise desirable, taxpayers with annual incomes in excess of $250,000 are more likely to have their tax returns audited than those with lower incomes.
- Sizeable Charitable Deductions
If a taxpayer claims a large charitable contribution or claims charitable deductions that represent a relatively large portion of their annual income, their tax return is more likely to be audited. Since the IRS computers are programmed with the standard charitable contribution for each income level, returns that show deductions in excess of this amount are more likely to be flagged for an audit.
- Deductions for a Home Business
Returns that claim home office deductions have a higher than random probability of being selected for an audit. While home office deductions can be great write-offs, it is important to have the proper documentation and to only claim space that is used regularly and exclusively for business.
- Foreign Bank Accounts
Because the IRS has recently stepped up its scrutiny of money held in offshore accounts, returns showing foreign assets are more likely than others to be selected for an audit. Taxpayers or businesses holding foreign assets should be especially careful to follow all established reporting procedures set by the IRS.
It is the legal responsibility any individual or business whose return is selected for an audit to substantiate the specific income and deduction items specified in the official IRS Notice announcing the audit. All required documentation must be provided within the specified time period. If additional taxes and interest are assessed by the IRS as the result of the audit, these amounts are usually matched by the State Tax Agency. Although the combined interest and penalty assessments resulting from an audit can be significant, it is important to realize that many properly conducted audits result in no additional tax assessments. If an individual or business disagrees with the results of an audit, they have the right to file an appeal though the IRS Appeals Division provided the appeal is submitted within 30 days of the issuance of the auditor’s report.
If your tax return has been selected for an audit, our experienced professionals can assist you in collecting the necessary documentation and preparing your response. The licensed CPAs, Tax Attorneys and Enrolled Agents at Professional Tax Resolution have extensive experience in the area of audit defense and are authorized to communicate directly with the IRS on your behalf. They have successfully represented many clients in IRS Audits that have resulted in either a refund or acceptance of the original tax return. For more information about our services, call us today at 877.889.6527 or visit us at www.professionaltaxresolution.com.
