These Red Flags can result in a Tax Audit
It may be tempting to attempt to reduce your tax burden by rounding some numbers up and rounding some numbers down when filing your tax returns. However, getting too loose with your numbers in your return can increase the risk of an audit. Common red flags that tend to increase the risk of an audit by the Internal Revenue Service (IRS) or local state agency include:
- Business ownership. Unfortunately, business owners are at an increased risk of an audit. Examples that tend to result in scrutiny include repeated filings claiming business losses and claiming a business expense for the entire cost of items that are often used personally as well, like a vehicle or cell phone.
- Foreign assets. The IRS continues to crack down on the under-reporting of foreign assets. Those who have financial interests abroad may need to report these assets by filing a Report of Foreign Bank Accounts (FBAR) or other tax forms.
- High earners. Simply earning a lot of money can increase the risk of an audit. The risk more than doubles once taxpayers claim over $1 million in income.
Although the agency has experienced cutbacks in recent years, it is becoming more efficient with the staff it has. Technological advances have resulted in the development of software that helps the agency find questionable returns.
In most cases, when the agency has a question about your returns they will send a mailing. Those with complex tax issues who are contacted by the IRS with questions about their tax returns are wise to seek legal representation to better ensure their rights are protected. An attorney experienced in tax audits and review the correspondence and represent your interests in your dealings with the IRS.