7 Ways to Guarantee an Audit

Posted on May 9, 2012 by Kursti Nakagawa

As the National Debt grows, the IRS has become increasingly vigilant with enforcing taxes. Therefore, returns that could have been accepted in prior years may now be flagged for an audit. Even small mistakes can influence whether or not you are audited.

Here are 7 ways to guarantee an audit:

Your income is suspiciously low or unusually high. Since the IRS knows the average salary in a given field, making less than other people in the same profession raises a red flag. Having a relatively low income while you reside in high income area is also a cause for review. On the high end, while the IRS audits less than 1% of taxpayers each year, those earning $100,000 or more are 500% more likely to be audited.

You fail to report income. You must report all wages, interest, dividends, capital gains, and miscellaneous income. All of your W-2s and 1099s are submitted to the IRS, so they can match your return against these documents and know if something is missing.

Your income has large swings from one year to the next. Since the IRS assumes that your income should be fairly consistently from year to year, large income changes that cannot be verified against your W-2s and 1099s will result in a red flag.

Your itemized deductions are too high. Deductions higher than the “average” can flag your return for an audit. This includes itemization from medical or dental expenses, taxes on real estate or personal property, interest on a home mortgage, gifts, sizable casualty or theft losses, and unreimbursed employee expenses.

Your charitable non-cash gift is valued at over $500. If your donation of valuable personal property $500 and over is not appraised or Form 8283 was not filed for your donation, you could be flagged for an audit. While taxpayers are entitled to a deduction for donations, it is for the fair market value of the donation—NOT the original cost. A general donations value guide is available on Goodwill’s website.

Your charitable contributions are overly generous. While charity is in no way discouraged by the IRS, if you are donating much more than the average person in your tax bracket, your return can be flagged. Make sure to have detailed and accurate receipts for all of your contributions.

You claim employee job expenses. The IRS assumes that if your employer doesn’t reimbursing you for an expense, it may not be a true job expense. Therefore, simply reporting a job expense can flag your return for an audit. If you receive a W-2, your job expenses would need to meet the following: the total of all the expenses exceeds 2% of your adjusted gross income, expenses are “ordinary and necessary,” and were not reimbursed.

If you have received an audit notice from the IRS or want to avoid mistakes on your tax return, our experienced tax settlement professionals can help. Please visit professionaltaxresolution.com for more information on our tax services. You may also call us at (877) 889-6527 or email info@protaxres.com to receive a free, no obligation consultation.

IRS Audit Red Flags – What the IRS is looking for – Tax Tips Part 3

Posted on January 18, 2012 by Kursti Nakagawa

Are you self employed? Do you file a Schedule C? If so, you have a higher likelihood of getting audited. Individuals and small business often make small mistakes that flags 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. Of course, doing your taxes the right way from the start is always the best advice. In part three 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. In this segment we focus upon those that are self employed or who own a small business.

Small Business/Self Employed Tax Return Red Flags

Schedule C – Overly Abused: Because there is so much abuse in the Schedule C it may be prudent for taxpayers to incorporate or form an LLC. The mere reporting of businesses operations on Schedule C rather than a separate corporate tax return increases a taxpayer’s chances of being audited 50 times.

Schedule C – Taxpayers who are employed by others (i.e. who receive a W-2 at year end) and who also claim a loss from a Schedule C business operation are likely to find their tax returns audited by the IRS.

Schedule C – Cash businesses: Small business owners, who have cash businesses: taxi drivers, car washes, bars, nail salons, hairdressers, small restaurants are easy targets for IRS auditors.

Schedule C – Large Meal and Entertainment Expenses: Big deductions for meals, travel and entertainment are always a audit red flag. Make sure your business conforms to strict substantiation rules for the expenses: amount, place, persons attending, business purpose and nature of discussion or meeting. Also, receipts are required for expenditures over $75 or any expense for lodging while traveling. Essentially if your meals, entertainment and travel expenses are more than 10 percent of your business’s gross income there needs to be a good reason.

Schedule C – Reporting business losses for more than 2 years consecutively: The IRS has a rule that you cannot deduct losses from a hobby on your tax return. You must be in business with the intent of making a profit. If the IRS deems that your “business” is actually a hobby, they will disallow the deductions.

Schedule C – Loss-generating activity sounds like a hobby:…dog breeding, horse racing, antique seller, classic car reseller. Tax laws don’t allow you to deduct hobby losses on Schedule C; however, you do have to report any income earned from your hobbies.

Schedule C – Claiming 100% business use for an automobile: Make sure you have very detailed mileage logs and precise calendar entries for the purpose of every road trip. if you use the IRS’ standard mileage rate to deduct your business vehicle costs, ensure that you are not also claiming actual expenses for maintenance, insurance and other out-of-pocket costs depreciation.

These and other tax tips are just examples of the type of the proactive, year-round tax guidance we provide to our clients. If you need to file your 2011 or prior year tax returns, or if you 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.

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

Posted on January 15, 2012 by Kursti Nakagawa

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.

IRS Audit Red Flags – What the IRS is looking for – Tax Tips Part 1

Posted on January 10, 2012 by Kursti Nakagawa

Most people have a great fear of getting audited. Audits can be long, expensive and can require a lot of supporting documentation and professional guidance. There are actually three types of Audits that an individual or business can experience, a field, office, or correspondence audit. Each comes with a different set of requirements to find a tax resolution.

Of course the fear of having a tax return audited is justified if you are misleading the government, but for most taxpayers it is simply a worry they hold in the back of their minds each year. Are you curious about what your chances to get “Flagged” for an audit review might be? With this in mind, we begin a three part blog series on common “Red Flags” that can trigger your tax return for an audit.

Tax Return Red (Audit) Flags – Part 1

Most tax returns are processed by IRS computers that are programmed to watch for anything unusual. Here are some red flags that may cause the IRS to take a closer look at your tax return:

Abusive tax shelters: Offshore Transactions involve activities in “tax havens” that offer financial secrecy. The IRS is intensely interested in people with offshore accounts, Failure to report a foreign bank account has strict penalties and the IRS has made this issue a top priority.

Foreign trusts (Disguise income because they are flow-through entities)
Foreign (Offshore) Partnerships, LLCs and LLPs
Offshore-Private Annuities or Offshore-Private Banks
Personal Investment Companies – Captive Insurance Companies – Related Party loans

Amending Returns: Did you forget to include a deductible expense which would give you a small refund? If that amount is truly minimal it could be better to just let it pass. Why? Amended returns get more attention from the IRS than initial ones – you may be inviting trouble.

Compiling your tax return incorrectly: Your return must be in the Proper Order. First, is the return itself. Then, attach the schedules in alphabetical order, forms in numerical order and plain paper statements. Do not forget to enclose W-2 and your 1099s. (or you could just e-file)

Disagreements between State and Federal returns: Oh how we love technology – here is another example of how computers are making the IRS an efficient agency. Be sure that ALL of your state and federal tax information match – because computers will catch any errors.

DIF Score: The IRS assigns a numeric value to tax returns known as a DIF score. The IRS used a computer-scoring system known as Discriminate Information Function (DIF). The DIF is based on deductions, credits and exemptions for the average taxpayer in each of the income brackets If deductions on your return are not comparable to your income bracket an audit/red flag is released. Here are some CCH Itemized Deduction Averages for 2008

IncomeRange	Medical Expenses	Taxes Paid	Home Mtg Interest	Charitable Contribution
$15 – $30,000	$7,000	$3,100	$9,200	$2,000
$30 – $50,000	$6,100	$3,800	$9,000	$2,100
$50-$100,000	$7,000	$6,000	$10,600	$2,600
$100-$200,000	$9,200	$10,800	$13,700	$3,700

Home office: This is because historically people who claim a home office don’t meet all the requirements for properly taking the deductions: 1) the space must be used EXCLUSIVELY and 2) on a REGULAR basis used as your principal place of business.

Mistakes, Math errors and Messy returns: This is one reason to file electronically. Computer software will calculate your return and create neat and clean copies to e-file. Mistakes can include writing your social security number for yourself, your spouse of your claimed dependents.

Pay or Contest: If you receive a small balance due from the IRS it may be better to pay it and forget it in. If you disagree it gives the IRS the opportunity to look more closely at your return so you could be liable for even a greater amount.

Round numbers: It’s unlikely that your investment returns were exactly $1,000 or that your mortgage interest deduction was $8,000. Too many round numbers on a return marks a return for an audit/red flag.

Underpayment: The IRS may audit you if you don’t pay enough taxes and don’t offer an explanation as to why you aren’t paying. If you can’t pay the taxes include Form 9465 “Installment Agreement Request”

Never boast you “outwitted” the Internal Revenue Service: Informers can earn a reward of 15%-20% of the additional tax collected, including fines, penalties and interest. So keep your “tax strategies” to yourself.

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 next installment of Audit Red Flags in the coming days.

If You Have Unreported Income You May Get a Letter from the IRS

Posted on November 10, 2011 by Kursti Nakagawa

Understanding The IRS “Soft Notice” Pilot Program to Encourage Income Reporting Compliance

In 2007, the IRS launched a pilot program designed to decrease the tax gap by identifying unreported income. Under this pilot program, which is still in effect, IRS notices are issued to taxpayers when there is a discrepancy between the income reported on their tax returns and the income reported directly to the IRS by various financial institutions and employers. These “soft notices” do not identify specific discrepancies or calculate amounts due. They simply ask taxpayers to review their returns and to file amended returns if errors are found.

In spite of the fact that these “soft notices” do not require any specific response or action on the part of the taxpayers who receive them, they should be taken seriously. The IRS designed these letters to encourage compliance through self-correction and should be considered as advanced notification that IRS software has picked up a disparity in reported income.

Although the “soft notice” pilot program collected more than one million dollars in its first year and it can be expected to continue for many more to come, the IRS has not collected enough data to determine its long term benefits.

If you received a letter from the IRS or an IRS Notice and are seeking guidance, call us toll free at (877) 889- 6527 for a free, no obligation consultation with a CPA. Professional Tax Resolution Inc., is an honest firm with strong values. We want our clients to understand all of the options they have and never promise that we can do something we can’t.

Tax Settlement can be achieved though many methods but often the most effective way is by reducing how the liabilities were incurred at the time and avoiding them in the future.