IRS Audit Red Flags

San Diego Tax Attorneys Help to Reduce your IRS Audit Risk

What are “IRS audit red flags” that may cause a return to be selected for an audit? The IRS keeps the audit algorithm a closely guarded secret, but there are patterns that evolve throughout the year, and over extended periods of time.  Recently, income has been one of the major sources of IRS audit.  For example, in 2014 the likelihood that a US taxpayer would be audited was less than 1% in general.  However, those who earned more than $200,000 saw that risk rise to 2.7%, and 1 in 13 high income earners above $1,000,000 faced an IRS audit.

Other recent areas for IRS audits have included:

  • Failure to report offshore bank or investment accounts or income
  • Data on W-2’s and 1099s does not match information provided directly to IRS by payors
  • Substantial losses reported on Schedule C
  • Rental losses from real estate
  • Claiming “day trader” losses when you are actually deemed to be an “investor” by the IRS
  • Travel and entertainment expenses that fall outside “norms”
  • Deductions disproportionately high based upon the amount of your income
  • Deductions for alimony or other support
  • Cash-based businesses
  • Losses from “hobby” activities

What Are Some Of the Classic Audit Risks?

There are three items that have been recently been cited in USA Today, and by many tax advisory services as potential IRS audit triggers:  Home Office Deductions, Charitable Donations and Unreimbursed Work Expenses.  Home office deductions can be appropriate and legal to claim a percentage of related expenses on your tax return.  The primary issue associated with this deduction are the percentage of home expenses claimed compared to the actual percentage of square footage dedicated for use as a home office.

Charitable donations have become much more regulated over the past several years.  Most charitable organizations, especially churches and service organizations, are now reporting specific contributions to the IRS, and providing specific donation values for each unique taxpayer.  Charitable contributions must be carefully documented, and the IRS maintains a substantial data analysis of typical giving trends.  If you are outside of the “normal” curve for charitable contributions it may trigger an audit.

Business expenses and profit or losses reported on Schedule C are always a primary focus with the IRS.  Most employers reimburse employees for appropriate business related expenses.  So a taxpayer with a high amount of unreimbursed business expenses may be immediately suspect in the eyes of the IRS.  Substantial business income or losses may fall outside of the traditional bell curve and trigger an audit.

Contact San Diego IRS Audit Attorneys

If you are concerned about valid deductions that might trigger an IRS audit, or you are facing a California or IRS audit, it is important that you fully understand the nature of your exposure and the options available to you. The attorney-client privilege is a valuable protection and one should never face the IRS or another tax agency without it. Call us for a free consultation at 866-631-3470 or contact our office to schedule an appointment to meet in person. We will discuss your concerns, the challenges you face, and the value that attorney-client privilege can bring to your case.