Audit Triggers

If the most popular question asked of a CPA is "can I deduct that?" the second most popular question is "will that cause an audit?". 99% of the time the answer is "maybe".

Often taxpayers will confuse an audit with a tax notice. The IRS uses tax notices to reconcile discrepancies between income reported to them from third parties compared to income reported on the taxpayer's tax return. Typically these notices can be cleared up with some correspondence and in some cases a telephone call.

Tax audits are much more involved. Typically a taxpayer will need to prove certain amounts reported can be substantiated by way of bank statements, receipts and other documentation.

While no one can predict with any certainty that a tax return will be selected for audit there are things that increase your likelihood.

Here is a list of items that increase your chances of being examined:

- Sole proprietorships that report large revenues and a small net profit or a loss. Schedule C entities are an IRS favorite. Probably because their experience tells them that there is either unreported income and/or overstated deductions.

- Big differences between you and other taxpayers. The IRS measures your return against the average amounts reported by other taxpayers. If you report larger than normal deductions it may increase your chances of being examined.

- Noncompliance. The easiest way to attract attention is to ignore the IRS. This is especially true if they are receiving information from third parties that show you have taxable income.

These are just a few things to consider. If you want to learn more about audit red flags contact me at tax@ajbtax.com.