If you are audited, the IRS will attempt to open up 3 years for examination. If the IRS finds unreported income or unallowed expenses, the tax bill can be staggering. And worse still — an auditor may refer you the IRS Criminal Investigation Division. In 2010, the IRS recommended 1,511 cases for prosecution and got a conviction rate of 90% with an average sentence of 27 months. Fortunately, there are steps you can take to avoid IRS audit red flags.
1. High income
According to IRS enforcement results, your chance of being audited triples once your income crosses $200,000. Obviously, high income is something you may not want to avoid, so be extra vigilant while paying attention to the other red flags.
2.Unreported offshore accounts
If you have previously unreported foreign accounts, the IRS has ways of tracking you down. The penalties if caught can be staggering. Go to our Offshore Bank account page to learn more.
3. Large itemized deductions
We advise our clients to deduct every penny you're entitled to — but realize that if your itemized tax deductions are bigger than most people's at your same income level, your return may get flagged. Just be prepared to properly document and explain such deductions. If a deduction seems questionable to you, be sure you have at least one professional opinion before claiming it.
4. Home offices
You can only take a home office deduction if you regularly and exclusively use part of your home as your principal place of business. If your office doubles as the kids' playroom, forget about it.
5. Missing investment income
You know those 1099 forms that financial services companies send you to summarize your interest and dividends for the year? The IRS also gets a copy. Make sure your return matches them.
6. Incomplete returns
If your return is missing a few pieces, the IRS may wonder what else you forgot. Tax preparation software, either self-prepared or professionally prepared, can help you avoid clerical errors that raise auditors' eyebrows.
7. Business losses
Make sure your expenses are legitimate, and that your business isn't just a thinly disguised hobby. You must treat your business like a business and not a hobby. Here are two examples: Legitimate deductions. Non-legitimate deductions.
8. Charitable deductions
You'll need a cancelled check or dated receipt for any cash contributions, and contributions of $250 or more require a written acknowledgement from the charity. If you made a non-cash contribution valued at more than $5,000, you'll need an expert appraisal to back up your claim. Also, and we see this many times, tax "professionals" will artificially inflate charitable contributions. Do not think they will provide a defense to fraud if you take their advice when you know it is not true.
9. Medical expenses
You only can deduct these costs to the extent they're greater than 7.5% of your adjusted gross income, and it's important to have detailed records. Not estimates. This rule can be very helpful. Plus, if someone is a dependant, those expenses can be written off as well.
Here's a true story. One client came to us and owed the IRS $40,000.00. I asked him how he got into trouble. He said he stopped making his tax payments because he had to pay medical expenses for his sick daughter. We asked him to gather up all his expenses. We amended his returns and he found out he owed the IRS nothing! And even better news…his daughter got better.
Now if you do find yourself audited by the IRS, contact us. We can help you to get through the process as smoothly as possible. Call us at 888-727-8796 or email email@example.com.