Every spring as April approaches, taxpayers across America submit their tax returns along with small prayers that they don’t get audited. After all, few situations are as nerve-wracking as having the federal government comb through your life looking for problems. The good news is that there are concrete steps you can take to reduce your risk of an audit, beginning with avoiding the following five items that could make you the target of an IRS audit. If you have been targeted for an audit, the best step you can take is to call an experienced tax audit and investigations lawyer.
- Report “Suspicious” IncomeAccording to IRS data, roughly 1% of Americans can expect to be audited each year. However, audits are not evenly distributed across income levels. For the vast majority of taxpayers, the IRS audits members of their tax bracket at a rate of approximately 0.5%, or about 1 of every 200 taxpayers. But for individuals reporting no income, that rate is more than ten times as high (approximately 5%). And for individuals reporting a great deal of income, the risk of audit grows even greater. Individuals reporting incomes of between $1 million and $5 million are audited at a rate of about 6%; individuals making $5 million to $10 million are audited at a rate upwards of 10%; and more than 16% of individuals reporting more than $10 million in annual income will be audited. Additionally, failing to report all taxable income can draw the IRS’ attention.
- Take Lots of DeductionsThe more deductions you claim on your taxes, the more likely it is that you will draw the scrutiny of the IRS. In particular, if the amount you are claiming in deductions is disproportionately large compared to your annual income, the IRS may decide to take a second look. This can also occur if you make a charitable donation that is unusually large for taxpayers in your income bracket. The risk of audit shouldn’t prevent you from claiming any deductions or making any donations that you see fit, but it should encourage you to keep thorough documentation just in case.
- Write Off LossesAlthough in most cases losses are not tax-deductible, there are a few circumstances under which the IRS will allow taxpayers to write off their losses. For example, some property owners who are actively involved in the rental of real estate properties are entitled to write off losses up to $25,000 annually. Similarly, some hobbyists are allowed to deduct losses attributed to their hobby if they usually make a profit pursuing it. However, these exceptions are relatively narrow and have strict requirements to qualify, so taking advantage of these write-off opportunities can sometimes trigger an audit.
- Operate a Small BusinessPoliticians have been lauding small businesses as the engine of the American economy for as long as the Stars and Stripes has flown over the Land of the Free. To help out small business operators, the federal government has approved a plethora of deductions and tax incentives for such enterprises. But with so many programs comes myriad opportunities for mistakes and fraud, so the IRS pays close attention to deductions and write-offs for small businesses. Two deductions in particular that can draw the IRS’ attention are the Home Office Deduction and claiming a vehicle was used 100% exclusively for business purposes, particularly if the taxpayer has no other vehicle for personal transportation. Similarly, because operating a cash-only or cash-heavy business presents ample opportunity for tax improprieties, these types of businesses tend to draw extra attention.
- Maintain Foreign Bank Accounts and/or File an International ReturnFinally, the IRS is generally suspicious of offshore financial institutions that aren’t subject to the laws and regulations of the United States financial industry. While there is generally no prohibition against banking and investing outside the borders of US, American taxpayers are still responsible for paying all applicable taxes and fees. Because the IRS disproportionately audits taxpayers who maintain foreign investments and deposits, those taxpayers would be wise to maintain excellent financial records.
Our firm understands that audits are stressful, with your family or business’ financial well being tied to the outcome. Our attorneys specialize in preventing audits when possible and expediting them when they’re necessary. If you have questions about preventing an audit, or if you’ve already received notice that you’re being audited and would like some guidance,
contact us today to schedule a consultation.
Posted in: Tax Audit