Tax Audits: Factors That Could Raise a Red Flag

Everyone knows how critical it is to keep accurate tax records and only claim legitimate deductions and credits but is there a secret to avoiding an IRS tax audit? Audit selection can be random, but that is not always the case.

Those who are self-employed, high income earners tend to be targets for an audit, but there are a few other factors widely believed to be “red flags” that could trigger an IRS tax audit. Here are some of those “red flags”:

• Discrepancy between claimed income and 1099s and/or W-2s.
• Abnormally large Charitable Donations (cash or non-cash).
• Owning a business that deals primarily in cash (i.e., doughnut shop, taxi service)
• Purchasing big ticket items with cash (i.e., cars).
• Claiming inflated business travel and entertaining expenses.
• Claiming a home office deduction.
• Claiming credits and not maintaining proper documentation to back up your claim.
• Failure to report off shore or foreign bank accounts.
• Failure to report large casino winnings.

The bottom line is a very low percentage of people are actually selected for an IRS tax audit (roughly 1% of taxpayers) but nobody is immune. The best defense often begins with a great offense – always do the right thing, file on time and double check for any omissions, errors and miscalculations. Finally, be prepared by keeping a complete, organized file of your tax records with any supporting documentation (going back at least 3 years) in the event you are selected for an audit.

IMPORTANT: If you are selected for an IRS audit, you should immediately contact your tax professional for assistance.

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