Circumstances That Will Increase Your Chance Of An IRS Audit

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Statistics show that the IRS only audits around 1% of all the tax returns filed by individuals each year, but there are some circumstances that may place you in the 1% that gets audited. If you are audited then a tax lawyer may be the best move. The tax deadline is coming up and there are some ways you can minimize your odds of being audited. There are some circumstances which make an IRS audit more likely, and avoiding the following situations can help you stay out of the IRS target. Some filing circumstances carry a higher rate of being audited and these include:


  •  More Than $200,000 In Income Reported For The Year


Higher incomes carry higher audit risks. Taxpayers who earned less than $200,000 have an audit rate of 1.02%, but when the income amount reaches $200,000 the rate of audits increase substantially to 3.93%. This means that roughly one in one hundred returns will be audited for income below $200,000,

but when this income threshold is reached roughly one in twenty five returns will be audited. If youi report income of at least $1,000,000 then you have a 1 in 8 chance of being audited. The higher your income is for the year the more likely it is that your tax return will be audited.


  •  Not Reporting All Income You Receive For The Year


The computer system used by the IRS has the ability to cross check and cross reference all social security numbers and taxpayer identification numbers. This is done for all of the W-2 and 1099 forms that are sent in to the IRS. If income is reported on one of these forms and you do not claim this income on your return then you have a higher chance of being audited. If you receive a W-2 or 1099 that has information that is incorrect you should contact the payer and make sure the information is corrected and then resubmitted to the IRS.


  •  Taking The Home Office Deduction


If you have a home office for your business then you are entitled to take the home office deductions allowed by the IRS, but you should understand that these deductions can greatly increase the risks of being audited by the IRS for the year you claim the deductions. If you have a legitimate home office that is used exclusively for your business and not for anything else there are a number of deductions that you are allowed. These deductions include a portion of the rent, insurance premiums, utility bills, taxes paid on the real estate, and other expenses paid for the year. If audited and the IRS decides that your home office space is not used exclusively for business purposes then the deductions will be removed and you could owe penalties and interest on these amounts. Many home office deductions are disallowed by the IRS, and that is why these deductions cause the computer system to kick back individual returns with these deductions for an audit more frequently.


  •  Not Reporting Any Offshore Accounts That You Have


If you have offshore accounts these must be reported to the IRS, and failure to report these accounts can carry very stiff penalties. In the last decade the IRS has gone after foreign banking institutions who allow American citizens to keep foreign accounts secret, and both large and small foreign banking institutions have been targeted by the IRS for this purpose. There is a very real possibility that these accounts will be discovered by the IRS so it is a smart move to report these accounts according to the IRS regulations and tax laws.


  •  Taking Travel And Entertainment Deductions


There are many allowable travel and entertainment expenses that may be deducted from your income, but taking these deductions can increase the chances of your tax return being audited. If you hold business dinners to discuss business matters or attract new clients, travel outside of your local area to conduct business or make sales, stay away overnight for legitimate business reasons, or entertain potential and current clients these are legitimate business deductions. These types of deductions are also frequently claimed without proper documentation though, and this creates an audit red flag for the IRS computer. Make sure to keep all receipts and track all expenses so that if you are audited you can prove you are entitled to the deductions your tax return shows.


  •  Operating A Business That Relies On Cash


Businesses which involve mostly cash sales are closely evaluated by the IRS, and this is due to the increased opportunity for tax fraud and under reporting income. If you have a business that operates on a cash basis this should not stop you from taking any deductions you are allowed. With this type of business it is extremely important for you to report all income though, because an audit that shows unreported income may lead to large financial penalties and interest amounts. In some cases not reporting income can be a criminal matter as well.


  •  Taking The Business Use Deduction For Your Vehicle


If you use your personal vehicle for business purposes then you may be able to claim a deduction. You must complete IRS Form 4562, Depreciation and Amortization, and this form requires you to list the percentage for the business use of the vehicle for depreciation purposes. Any claims that a vehicle is only used for business and not for other uses will cause your tax return to be red flagged by the computer for an audit. Keeping a detailed record of the mileage for the vehicle will help support your deductions, and if the standard mileage rate provided by the IRS is used you can not take the deductions for any maintenance, repairs, insurance premiums, and other expenses for the vehicle.


  •  Claiming Excessive Charitable Donations


If you claim charitable donations that seem excessive when compared with your income for the year then the IRS computer system will flag your return for additional scrutiny and possibly an audit. If your donations include anything other than cash this will increase the audit risks, and IRS Form 8283, Noncash Charitable Contributions, should be filled out and submitted with your tax return to lower the audit risks. The items donated should be appraised before donating if these items are valuable to show the actual value of your non cash donation.


There are other circumstances that can also increase your chances of an IRS audit, including high deductions versus total annual income, taking deductions for a craft or hobby, and cash transactions which are large and seem suspicious. If you are audited and your deductions are eliminated you could find yourself in significant debt to the IRS, The experienced attorneys at Richard West Law can help provide a free debt consultation to help you find the right answer for your unique debt problems and circumstances. Visit or call (513)771-8700 or (937)748-1749 to get the answers you want, and the financial relief and answers you are looking for.

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