Audit "Red Flags"
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What is an audit red flag?
Recent years have found an increase in the number of audits performed by the IRS on taxpayer income tax returns. They have been focusing on high income individuals (many tax loopholes exist, you know), Schedule C (sole proprietors) filers, partnerships, abusive tax shelters, and corporations in general. If your income tax return stands out from the rest, it is called an ‘audit red flag'. Here are some reasons your 2006 income tax return may be receive an ‘audit red flag':
- You own and operate a home business office. There are strict rules, regulations, and guidelines that must be met in order to qualify for this deduction. Many taxpayers claim this deduction, yet do not qualify. If you claim an excessive amount of deductions, you will probably be ‘red flagged'.
- Your business deductions are much larger than your business income.
- You are claiming business deductions that appear questionable to the IRS.
- You have a history of IRS audits.
- You are a shareholder of a corporation that has been audited by the IRS.
- You claim tax-shelter losses.
- You claim an earned income credit. Much abuse of this credit has occurred in the past causing the IRS to notice taxpayers who claim it.
- You are married, but filing separately. This increases the chances of inconsistent information between the two taxpayers.
- You receive an inordinate amount of cash during your business transactions.
- Your itemized deductions are much larger than what the IRS considers acceptable. The areas of particular concern involve medical, taxes, and interest.
- You claim charitable contributions that are not in line with your income.
- You are reporting information without any clear explanation, such as complex business or investment transactions.
- You under-report an excessive amount of income. Every time you receive income from a source, an IRS Form 1099 is filed with the IRS. You must know this. There is a comprehensive program put into place within the IRS to match information you put on your tax return with that of information submitted from outside sources (those providing you with the Form 1099 series, for example). In other words, the information you report on your income tax return does not match information received from third-party documentation.
Only a small amount of income tax returns are audited by the IRS. The above information is useful to you so you can be certain about not receiving an audit “red flag”.
Another “audit red flag” involves if your income tax return was prepared by someone who is on the IRS list of “suspectable tax preparers”. Otherwise known as a problem preparer, they are known to violate the IRS tax laws. That is another reason to check the background on whom you decide to prepare your income tax return.