The IRS puts extensive resources into audits and enforcing tax law. Dealing with an IRS audit can be challenging and stressful for businesses and individuals, especially when the potential consequences could lead to penalties or fines. However, understanding the elements of a tax return that increase the likelihood of an audit can help you take proactive steps to avoid these red flags and minimize risk.
Impact of Increased IRS Funding
Over the last few years, the IRS has seen a huge spike in funding to enhance its operations with technology and increased staffing. This ultimately contributes to its compliance and enforcement capabilities, and many businesses and high-income individuals may notice an uptick in audits or inquiries. Their goal is to address the under-reporting of income and promote fair tax practices, but that comes at a steep price. Taxpayers will have to diligently maintain records and perform self-audits to ensure compliance and avoid potential civil or criminal allegations. Although the IRS will have to prove beyond a reasonable doubt that tax crimes were committed in bad faith, avoiding the possibility of an audit or investigation altogether is the best option.
Potential Audit Triggers
The complexity of tax situations have a strong impact on the likelihood of an audit. Here are some examples of tax situations that may trigger an audit:
Underreporting Income: Failing to report all of your income, whether intentionally or inadvertently, can raise red flags and increase the likelihood of an audit. Ensure that you accurately report all sources of income, including investment earnings, self-employment income, and income from side jobs.
International Financial Accounts: Many individuals, particularly U.S. citizens/residents living outside the country, may be unaware of their obligations to report worldwide income, foreign bank accounts, foreign corporations/trusts, and gifts. The IRS is actively focused on detecting and preventing offshore tax evasion.
Inconsistent Information: Discrepancies between information reported on different forms, such as W-2s, 1099s, or other tax documents, can trigger an audit. When preparing your tax returns, utilize CPA services or double-check to make sure that all forms match. Reporting accurate information will help to minimize inconsistencies.
High-Income Earners: Individuals with higher incomes, often with an annual income of $250,000 or more, have a higher likelihood of being audited. This is especially true for high earners that are self-employed or business owners. The IRS focuses on auditing high-income taxpayers to ensure proper reporting and compliance.
Claiming Excessive Deductions: The IRS is particularly sensitive to taxpayers who claim large deductions, especially for items such as charitable contributions, business expenses, and medical expenses. Legitimate expenses are deductible, but when businesses claim personal expenses as business-related, it can draw attention.
Proactively Addressing Tax Compliance
It’s important to note that these activities do not automatically imply tax fraud or compliance issues, nor do they guarantee an audit. Understanding where your tax filings could be misconstrued by the IRS is essential to avoiding potential tax issues. However, even if you adhere to tax law, accurately report income, and maintain documentation, it’s still possible to be audited, and unfortunately, it’s still possible to face civil and criminal accusations.As a taxpayer, you have certain responsibilities, but you also have rights. If the IRS believes that your tax filings were made in bad faith, they will pursue civil litigation or criminal charges. Typically, defendants aren’t convicted over genuine tax filing mistakes, but there is still the possibility of hefty fines. At Waserstein & Nunez, PLLC, has extensive experience helping businesses and individuals with U.S. tax laws affecting them inside and outside the U.S. If you have been contacted by the IRS, do not engage until you’ve spoken to an attorney. Call us at (305) 563-1011 to schedule a consultation today.
Waserstein & Nunez, PLLC
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