Tag Archives: Audit Appeal

IRS Audit Red Flags – What the IRS is looking for – Tax Tips Part 2

Posted on by

The Federal Budget Deficit is a large concern and the IRS has become more vigilant with tax enforcement.  The IRS is already paying more attention to returns that might have been passed over for an audit in years past. With more audits occurring, more and more people are concerned about making small mistakes that might flag their tax return for an audit.  Taxes are no place to falsify information but small mistakes and common practices such as rounding numbers can give an IRS agent enough reason to audit your entire return.  Doing your taxes the right way from the start is always the best advice. In part two of our three part series on Tax Tips to Avoiding a Costly IRS Audit, here is a list of additional “Red Flags” that can trigger an audit of a tax return.

What might bring your return to the attention of the Internal Revenue Service?

Income – Suspiciously Low: The IRS knows how much somebody in your field earns on average.  If you are making less than others in the same profession that raises an audit/red flag.  Also, if you have relatively low income but live in a high income area the IRS may review your return.

Income – Unusually High: Though fewer than one-percent of taxpayers are audited each year, those making over $100,000 are 500% more likely to be audited.

Income – Failure to Report:   If you file a return but fail to report ALL the income you received, you’ve run up an audit/red flag. All of your wages, interest, dividends, capital gains and miscellaneous income must be reported to the IRS. The IRS receives copies of ALL W-2 and 1099s and computers match these records  

Income- Large Swings:. The IRS believes that your income should be consistent from one year to the next. If there are large changes in income, that cannot be backed up by your 1099s or W-2s, this is a audit/red flag.

Itemized Deductions – Too High:  Any deductions outside of the “average” will release a audit/red flag. So, watch out if you have a lot of itemization such as (Medical or Dental Expenses)(Taxes:, Real Estate or Personal Property) (Interest: Home Mortgage, Points or PMI-Insurance Premiums) (Gifts: Cash, Check or Fair Market Value of Donated Goods) (Sizable Casualty or Theft Losses) (Unreimbursed Employee Expenses)

Itemized Deductions  – Charitable Non-Cash – Over $500:  If you don’t get an appraisal for donations of valuable personal property or if you fail to file Form 8283 for donations over $500 an audit/red flag appears. Taxpayers are entitled to claim a deduction for the fair market value of the property donated NOT the original cost. For the current Fair Market Value,  there are two free tools at your disposal: ItsDeductible, from Intuit, and DeductionPro, from H&R Block

Itemized Deductions – Overly Generous Charitable Contributions: Charity is wonderful, but too much charity could be audit/red flag. If the average person in your income bracket donates about $500 to charity and you claim you donated $5,000 you better have detailed and accurate receipts.

Itemized Deductions – Employee Job Expenses: .The IRS starts with the assumption that if an employer doesn’t reimburse a specific expenditure made by the employee that expenditure is probably not a true job expense. Consequently, the mere existence of a Job Expense will cause an IRS red flag.  So,  if you are a W-2 employee you must meet the following guidelines: total of all expenses exceeds two percent of your adjusted gross income; the expenses are deemed “ordinary and necessary”; and the expenses were not reimbursed.

These tax tips are just examples of the type of the proactive, year-round tax guidance we provide to our clients. We have more we want to share with you about IRS Audits so look for our third and final installment of Audit Red Flags in the coming days. 

If you need to file your 2011 or earlier tax returns, or have an IRS or State Tax problem, our experienced tax professionals can help. For more information about our tax services, visit us today at www.professionaltaxresolution.com. You may also Contact us by phone at (877) 889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.

Audited? Overwhelming Penalties & Interest? Request a Penalty Abatement.

Posted on by

Taxpayers with tax debt soon learn that the actual amount of tax they originally owed the IRS or State is only a part of the amount they now owe overall. The balance may be much larger due to the assessment of penalties and interest. Although many find it shocking, it is not uncommon to balances that have increased by as much as 50% because of penalties and interest.

One of the larger penalties is the “Accuracy Related IRS Penalty”. This large fee is generally 20% of any portion of a tax underpayment which the IRS determines is attributable to one of the following:

1. Disregard or negligence of IRS rules and regulations

2. A substantial understatement of IRS income tax due

3. A substantial valuation misstatement covered under Chapter 1 of the Internal Revenue Code

4. A substantial overstatement of a pension liability

5. A substantial estate or gift tax valuation understatement

When is this penalty assessed? Taxpayers who have gone through an audit often incur an “accuracy related penalty.” Most often this penalty is the result of an audit where it was determined that there was a substantial underpayment of the taxes due at the time of filing.

This is one of the reasons that an IRS Audit can be so intimidating and worrisome. Taxpayers fear not only the tax debt itself but the very significant addition of the penalties and interest.

In these situations, hiring a professional tax settlement firm should be strongly considered. The problem with having significant amounts of tax debt is that outstanding tax debt issues are usually owed to both the IRS and state tax boards for multiple years. Unpaid tax debts resulting in the assessment of the “accuracy-related penalty” are generally also assessed underpayment penalties and multiple other penalties and fees. As if that wasn’t enough, until they are paid in full, all of these balances continue to accrue interest.

Unfortunately these situations can continue to snowball until they are so large and difficult to solve that they require a thorough examination of all tax settlement options, especially for taxpayers that are already in a poor financial situation. There is hope though. A qualified and reputable tax resolution firm can help you determine if you are eligible for IRS penalty abatement. If you are a candidate, it is possible to request an IRS penalty abatement of the assessed “accuracy-related penalty.”

To file this penalty abatement request, the taxpayer must be prepared to demonstrate that the taxpayer “acted in good faith and has reasonable cause”. The determination of whether a taxpayer acted with “reasonable cause” and in “good faith” is made by the IRS on a case-by-case basis. Hiring the right professional to ensure you have a solid case becomes very important as the IRS will take into account all specific facts and circumstances. Probably the most important factor the IRS considers is the extent of the taxpayer’s effort to report the proper tax liability.

If a taxpayer did not keep adequate books and records, they may have a very difficult time claiming to have acted with “reasonable care”. However, a taxpayer who has honestly relied upon the advice of a tax professional, and who has made a “reasonable effort” to assess their IRS tax debt liability, will have a better case even if the advice they received turned out to be incorrect. An honest misunderstanding of fact or law may also be considered “reasonable cause and in good faith” if the IRS feels the misunderstanding is reasonable.

Of course, simply requesting the abatement is not enough and just because you previously relied upon the advice of another or you had an honest misunderstanding of the tax law does not necessarily demonstrate to the IRS that you had “reasonable cause and good faith”. This is why the IRS looks at all of the facts and circumstances when considering a taxpayers request for tax debt penalty abatement.

Talk with your professional tax resolution specialist as it relates to your specific circumstances. Carefully consider all of your tax debt settlement options such as requesting an IRS penalty abatement, entering into an installment agreement, submitting an offer in compromise, and various other alternatives.

Remember, the problem won’t go away, it only compounds so the worst option is to do nothing.

Our licensed experts at Professional Tax Resolution (www.professionaltaxresolution.com) can assist you in determining which tax settlement options are appropriate for you based not only on your tax debt but your financial circumstances as well.