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.

More Updates

CRDS AND ROTH CONVERSIONS – ABUSE OF THE RULES?

The coronavirus-related distribution (CRD) rules for Roth conversions have a gaping hole. An “affected person” (as we have defined in previous blogs), is entitled under the CARES Act to withdraw up to $100,000 from their IRA or workplace retirement plan. A CRD avoids the 10% early distribution penalty for those under 59 1/2, can be

Read More »

Rolling Over an RMD

Like most people’s lives, the retirement world is upside down. This is made evident by a single statement: “Required minimum distributions (RMDs) can be rolled over.” Yes, that is the new normal—at least for this year. RMDs are considered the first money out of an IRA and workplace plan. Typically, these dollars are ineligible to

Read More »

Tapping Into Retirement Accounts If Not Directly Impacted By COVID-19

The recently-­‐enacted Coronavirus Aid, Relief, and  Economic Security Act (CARES  Act) signed by President Trump  on  March  27, 2020, allows  “qualified individuals” to take up  to  $100,000 of  penalty-­‐free IRA and company plan withdrawals during 2020. “Qualified individuals” include those who are (or whose family members are) sickened by the virus or who have virus-­‐related

Read More »
Scroll to Top