IRS Audit Help, IRS Audit Process, Tax Audit

Three Common IRS Tax Audit Triggers

May 21, 2012 - IRS Audit Help, IRS Audit Process, Tax Audit

If you want to hear IRS say “Come on down!” like Bob Barker or Drew Carey on “The Price is Right,” then you’ll want to be sure to make one of these common mistakes on your return. Did you know IRS is the ONLY agency of our government that is empowered to collect the money that our government will spend? Their job is to determine if the correct amount of tax has been paid. Sometimes their examination, or audit, results in money due you, a refund. Rarely, but it can happen, the audit winds up a “no-change”. The IRS Agent or Auditor finds nothing to change and no money changes hands. But more often than not, their examination, their audit, results in money you owe the IRS. IRS doesn’t have time or resources to waste on an IRS tax audit that does not bring in money. They even have a special formula they use in selecting the returns they want to audit. This formula is called the DIF score, or discriminate information function score.

Avoiding an IRS Tax Audit

Hundreds of thousands of returns have been examined over the years and the results of these examinations have enabled the IRS to hone their selection process. Has yours been one of those returns? Do you want to volunteer for an audit? Heck no, that’s why you are reading this! Avoid the following to lessen your chance of being invited for an IRS tax audit interview:

1. OMIT INCOME that should be reported. This can be “oops, I forgot.” “I lost this W2, this 1099.” It can mistakenly be, “How will they know?” What’s the difference? A W2 is what you get when you are an employee. A 1099 is what you get when you are an independent business owner. There are many kinds of 1099 forms. When you fail to report income that someone else has reported to the IRS because they want the deduction they are allowed when they pay you, you are omitting taxable income. This omission can be called unreported income. It can be called underreported income. It is often called “Audit”.

2. Filing a BUSINESS LOSS when you also have W2 income. Without going into how a tax return is prepared, or “built”, IRS will almost always look at this kind of return. Are you really engaged in an activity for profit? Are you serious about your business? Are you trying to deduct expenses for a hobby? Hobbies do not belong on Schedule C. Are you exaggerating your expenses? This is an audit.

3. How ROUND are your numbers? IRS does not want to see pennies on the tax return. They do want you to round your figures to the nearest dollar. But rounding to the nearest $5, $10, $20, $100 is not appropriate. If you have too many expenses with too round a number, IRS will wonder if you are accurately reporting your figures. They will want to ask you. That is an IRS tax audit.

I cannot overemphasize your need to keep records, your need to keep adequate and accurate records. Certainly, take the deductions you are entitled to, just keep your receipts, add you numbers carefully. Learn what you can do. And just as important, learn what you cannot do.

What steps have you taken in your business to avoid an IRS tax audit?