Audit Red Flags

April 30, 2012

Presented by Eric C. Pritz, CFP®, CMFC

What raises eyebrows at the IRS?

After tax filing, there are many individuals living in fear of an IRS Audit. This fear may be overblown – according to Internal Revenue Service data, just 1.6 million taxpayers were audited in 2011. The agency reviewed about 1% of returns sent in by taxpayers making less than $200,000, and no more than 12% of millionaires had their returns scrutinized.1,2

Still, no one likes extra stress courtesy of the IRS. Self-employed individuals seem to be magnets for audits – in fact, IRS data indicates that people who work for themselves and earn from $100,000-$200,000 yearly are five times more likely to get a second look from the agency than the typical employee.1

Below are some red flags that might get you extra IRS scrutiny.

A Schedule C that hints at some odd bookkeeping. Schedule Cs get a close look annually as the IRS seeks to remedy the tax gap (the difference between federal taxes owed and federal taxes paid). As Schedule Cs are often filled out by solopreneurs and small business owners themselves, the chances increase for claiming substantial deductions that may be hard to substantiate.1

Taxable income of $1 million or more. Millionaires work with accountants for a reason – generally speaking, returns prepared by tax professionals raise far fewer red flags than DIY ones. If you will make around $1 million this year, look back at the first paragraph of this article and consider whether or not it might be wise to defer some potentially taxable income into 2013.1

Bad math. Calculators are readily available and they can be as crucial as software when it comes to filing your federal return. The IRS does spot mediocre mathematics in returns. It has even recalculated taxes to save people money in years when special tax credits were available, such as the Making Work Pay credit. However, it also finds unreported and underreported taxable income through the same scrutiny. In fact, the IRS found 4.2 million math errors last year on tax returns for 2010.1,2

Huge deductions. Is your money-losing small business venture truthfully just a hobby? Did you really donate $4,000 worth of office supplies to a charity, and do you have the receipts to back that up? The IRS routinely checks returns for deductions that seem outlandish.1

Living large. Does the IRS peruse social media? Yes it does, just as many people do. The IRS has done good detective work for years; its investigators know to check out DMV and employment records to get a better picture of an errant taxpayer. Today, photos and posts on Facebook and MySpace and Twitter can telegraph potentially valuable nuggets of information, particularly about young taxpayers who have come into wealth that their returns don’t seem to show.1

If you’re reading this, you’re paying more attention than many others. That claim really isn’t so grandiose – a staggering number of Americans pay scant attention to their federal taxes. According to the 2012 Taxes and Savings Survey from Capital One Bank, 11% of American taxpayers choose to file at the last minute. For that matter, about 5% of Americans (that’s 7 million people) don’t file federal returns at all – and in some cases, it isn’t just because they don’t earn enough taxable income.2

P.S.: you or someone you know might be eligible for some money. The IRS has more than $1 billion in unclaimed refunds just waiting for U.S. taxpayers who didn’t send in federal tax returns for the year 2008.

Eric C. Pritz may be reached at 310-712-2349 or epritz@seia.com

The information presented is not intended as tax, legal or financial advice, and may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Article written and provided by marketinglibrary.net, Inc. Copyright 2011 marketinglibrary.net, Inc. Registered Representative/Securities Offered through Signator Investors, Inc., Member FINRA, SIPC, 2121 Ave of the Stars, Suite 1600, Los Angeles, CA 90067 (310)712-2323. SEIA, LLC and its investment advisory services are offered independent of Signator Investors, Inc. and any subsidiaries or affiliates. SEIA 12012011-00725.

Citations.
1 - www.smartmoney.com/taxes/income/5-ways-to-avoid-an-irs-audit-1328740306206/ [2/10/12]
2 - www.foxbusiness.com/personal-finance/2012/04/13/5-last-minute-tax-mistakes/ [4/13/12]
3 - www.irs.gov/newsroom/article/0,,id=254725,00.html [2/23/12]

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