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Tax Advisor Tip: How Not To Get Audited
R. Espy
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Defined Tag: Tax Advisor.
Just hearing the word audit is enough to send most people running for IRS Tax adviser and send a shiver up their spine. Wouldn't it be great if you can learn how to avoid a IRS tax audit? Well there are certain things you can look out for that will trigger an audit. Here are a few...
Claim Tax Deductions You Are Entitled To
Take the legitimate credits and deductions that you are entitled to. If there are questionable items on your tax return that could raise a red flag you might want to send with the return an explanation and/or documentation to back up the claims legitimacy. If it is reviewed by a real person because the return has been flagged these will help.
The Discriminate Index Function:
The IRS uses a computer program to flag tax returns. This program is named the "Discrimnate Index Function" (DIF). DIF compares a taxpayer's deductions with others in the same income bracket. The program gives every return a computer generated score that indicates the probability that questionable items exist on the return. The more your return deviates from what is considered NORMAL, the higher your score will be and of course the more likely you will be audited.
Some Common IRS Tax Audit triggers are..
Any Unreported Income
PLEASE for your sake, report all your income, this can help avoid an IRS tax audit. The IRS has computers that will compare income you reported when you filed your return to information it receives from employers and from 1099 forms that were issued by banks and brokerage firms to you. Compare the income you plan to report on your 1040 to your W2 forms and all 1099 forms, before you file.
Suspect Itemized Deductions
Itemized deductions you have claimed that are unusually high based on your income can trigger an audit. For example, lets say you make $29,000 and you show charitable contributions of $10,000. This would not be reasonable for the income you have reported and, it is very likely the IRS will look closer at your return.
Home Office Deduction or Business Expenses
You wouldn't think that being in business would be a trigger but it is one, especially if you are a sole proprieter and file Schedule C. This is partially true because the IRS has surmised that those that are self employed have more opportunity to hide income. It also allows the taxpayer opportunity to convert personal expenses into business expenses. The home office deduction is tricky so you might want to consult with a tax advisor or other tax professional to determine your eligibility before claiming the deduction.
Not Claiming Cash Income
Many taxpayers receive all or a large portion of their income in cash. Waiters, taxi drivers, hairdressers,etc. are prime targets for an IRS audit. That’s in part because they receive much of their income in the form of cash tips. The best advice you will ever be given is to keep accurate records. A IRS publication 1244, Employee’s Daily Record of Tips and Report to Employer should be used to track daily tips.
Divorce, Alimony and Dependents
In case you're divorced, only one parent, usually the custodial parent can claim a child as a dependent. A tax waiver is required if that is not the case, signed by the custodial parent in order to take the deduction. Be aware the IRS matches tax deductions for alimony payments by one former spouse with the taxable income reported by the other.
Offshore Accounts
Offshore accounts are rarely used by people whose wages are reported to the IRS by employers. The money generated in offshore accounts is legal so long as it is reported and taxes are paid. The failure to declare this income and to pay the tax on the income is a felony punishable by up to five years in prison.
Problem Tax Preparers
If your return is signed by a tax preparer that is on the IRS's list of "problem preparers"(preparers that have violated the law repeatedly), this increases the probability of audit selection. Too bad this list is not available to taxpayers. Wisely choose your tax preparer.
Any scheme, scam, questionable filing and even honest mistakes can raise a red flag and lead to an audit. Professional tax preparation help show you how to avoid an audit. However, should you be audited don't hesitate to seek help from professional IRS tax advisors.
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