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IRS TAX AUDIT TRIGGERS – top 5 triggers.
Tax season has just finished but many are starting to think about the upcoming tax season. Some just think about a fat refund coming their way, but others strategize and worry about how to avoid the top IRS audit triggers.
In actuality, a very small number of tax returns are selected for IRS tax audit. In 2015, less than 1% were audited. The IRS does not really tell us exactly what may trigger an audit, however, there are definitely a number of items to be aware.
1. You earned more than one million.
If you make more than one million, you will have a target on your back. According to the Internal Revenue Service Data Book 2015, returns with income of $100k to $199k were audited at a rate of .64% versus returns with income of $1 million to $5 million being audited at a much higher rate of 8.42%.
2. You had large business deductions or have been operating at a loss.
The IRS will certainly investigate if a certain business deduction is disproportionately large compared to your income from the business. Make sure you keep all substantiation to back your deduction taken. Similarly, operating at a loss, especially for more than three years will certainly trigger an IRS tax audit.
Unfortunately, taxpayers that file a Schedule C are already suspect because it is all too easy to abuse certain tax deductions. A common mistake is taking a business tax deduction that is actually for personal use and taking it as, for example, a vehicle expense, business travel expense or home office deduction.
3. You took large charitable deductions.
Again, if these deductions are disproportionately large as compared to your income, they will be suspect. Just be sure to keep detailed records of your cash and property contributions.
4. You did not report all income.
If you receive a W-2 or 1099 reporting income from a business, this information is sent to the IRS. If you do not report the income from these sources on your tax return, an audit will be triggered.
Be sure to keep all forms and keep your address updated with your previous employers to make sure you receive all forms at tax time. Not having these forms is not an excuse to not report it.
Also, if an error is found on an income form, be sure to correct it with the business who will then correct it with the IRS. If it is not corrected, the IRS will only go off of the information that was reported to them.
5. IRS Tax audit Trigger – Rental property tax losses
If you took rental property losses on your tax return, you may face an audit. These types of losses are heavily scrutinized by the IRS, and the rules to take them are quite strict. In order to fully deduct these losses, you must be a real estate professional or actively participate in the renting of your property. Real estate professionals must materially participate in real estate with over 750 hours each year and spend more than 50% of their working hours in real estate.
The IRS is toughest on taxpayers claiming to be a real estate professional. If you are not a real estate professional, you may deduct up to $25,000 of property loss, which starts to phase out once your income reaches $100,000.
6. Will foreign bank accounts trigger an IRS tax audit?
If you did not report your foreign accounts, it may trigger an IRS audit. If you have any accounts overseas, you need to report them or face an audit which may lead to severe IRS penalties.
FinCEN Form 114 (“FBAR”) must be filed by April 15th to report any foreign accounts with an extension available to October 15. The general rule is the following: Any U.S. person, whether an individual or an entity, with a financial interest in or signature authority over one or more foreign bank or financial accounts must file an FBAR when the aggregate value of the accounts exceeds $10,000 at any time during the year.
If you do have to face an IRS audit, protect yourself and hire a tax attorney. Having a tax lawyer by your side gives immense reassurance that you have a professional that has the knowledge and ability to analyze the many complexities in the tax law. If resolution is needed, there are several options to consider, including a payment plan or an offer in compromise.
Los Angeles Tax Attorneys at Delia Law have many years of tax resolution experience and will competently represent you before the IRS. Please call for a no-cost tax attorney consultation at (310) 494-0100. We look forward to helping you.
This blog post is not intended as legal advice and should be considered general information only