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Who Gets Audited by the IRS? Likely Targets of IRS Audits

David Mitchell — Tue, 25 Oct 2011 18:39:07 +0000

Are you worried about being audited by the IRS? Do you know whether or not you fall into a high-target area for an IRS audit?

Even though most people will never be audited during their lifetime, there are certain tax filing categories that the IRS targets more frequently than others. If you fall into one of those categories, you will want to be extra careful when filing your tax return.

While it is important for everyone to be truthful, keep good records and back up documentation when reporting taxable income, tax credits and tax deductions to the IRS, it is even more critical for those who are prone to being audited.

Who is Most Prone to Being Audited?

Out of all tax returns there is about a 1% chance of receiving an audit. If you segment out tax returns by income level and type of business (Corporation, self-employed, partnership, individual, etc), you will see that some people are much more likely than others to be audited. If you fall into one of the following categories, you will need to be on high alert for a potential IRS tax audit:

Self-Employed Individuals: If you are self-employed and you report your income to the IRS on a Schedule C form or a Schedule E form, you are considered a prime target for an audit. Those who are self-employed generally have multiple tax deductions and the IRS will want to know that all of the deductions that you claim are legitimate. If you claim a net loss – especially if you claim one for multiple years in a row – your chances of being audited increase even greater.

High-Income Taxpayers: If your income is in the millions, beware. The number of IRS audits on millionaires – particularly those earning more than $5 million per year – is on the rise. Even individuals earning over $200K a year are more likely to receive an audit. (Numbers below are based off of 2008 audit rates, which typically don’t change much from year to year.)

Income $100K-199K = Average risk for audit (about 1% chance)
Income $200K-499K = 2 times more likely to get audited
Income $500K-999K = 3 times more likely to get audited
Income $1M-4.99M = 4 times more likely to get audited
Income $5M-9.99M = 6.5 times more likely to get audited
Income $10M+ = 10 times more likely to get audited

Small Business Owners: If you own a small business, you are another likely audit target of the IRS. Small businesses are often targeted for audits due to errors in filing. If you are a small business owner, your best bet is to hire a tax preparer who specializes in small business taxes to prepare and file your tax return on your behalf.

Itemized Returns: Itemized returns are much more likely to be chosen for an audit compared to those returns that use the standard deduction. When you itemize, you leave more room for error. Additionally, the IRS is well aware that many taxpayers exaggerate their tax deductions.

Businesses that Operate on Cash: If you run a business that takes in mainly cash you are another prime target for an IRS audit. It is, of course, easier to not report income if your business primarily deals in cash and the IRS works to prevent this from happening. If you run a cash business your best defense is to keep precise and accurate records to back up your income claims and to verify tax write-offs.

Tips to Help You Avoid a Tax Audit

Here are some tips that just might save you from a tax audit:

Make sure that all of the information on your tax return is accurate. This means double-checking your math, making sure that you’ve accurately listed your social security number, ensuring that you have claimed the correct number of dependents, filing under the correct status, and so on.
Be sure to report all of your income. If, for example, you are a contractor who has received multiple 1099s, be sure to total your income accurately and do not leave any earnings out.
Be careful about reporting business losses, especially for multiple years in a row.
Do not claim credits and deductions that you are not eligible for.

If you are at risk of being audited by the IRS or if you are unsure as to whether or not you may be at risk or how to file your taxes, it is always recommended that you seek the guidance of an expert tax professional.

When Income Reported on Tax Returns Doesn’t Match Bank Records

Manny Davis — Thu, 04 Aug 2011 06:01:28 +0000

If you think that you can get away with reporting income on your tax return in a manner that is different from what your bank deposits show – think again. The IRS and the banking industry are on the same team, and in an attempt to deter tax crimes, the IRS requires banks to report all large cash transactions.

Additionally, the Department of Treasury has an entire division that focuses specifically on analyzing bank reports to uncover finance-related criminal activity.

If an individual reports income on a tax return in an amount that is significantly lower than deposits that were made to his bank accounts, an IRS audit will seek out this unreported and misrepresented income. Wrongly reporting income or claiming false deductions, expenses and credits is simply not worth the risk of the severe penalties that may result from doing so. Here are some of the reasons why:

Bank Reporting Requirements to the IRS

Beginning in 1980, in an effort to detect money laundering, it became required for financial institutions to report large cash transactions to the IRS. In 1996, reporting regulations were modified to include “any activity deemed suspicious or fraudulent.”

Banking institutions are mandated to submit a Currency Transaction Report (CTR) whenever a large transaction – any amount exceeding $10,000 – takes place. Strangely enough, wire transfers, check transactions and non-cash transactions of $10,000 or more are not subject to the same IRS reporting requirements. Financial institutions are responsible for combining all transactions made on the same business day from a single account, and if the total amount of all daily transactions totals or exceeds $10,000, the bank is then required to submit a CTR as well. CTRs can be submitted to the IRS electronically, and most institutions are set up to automatically create the required reports whenever the qualifying criteria is met.

Additionally, the Suspicious Activity Report (SAR) is filed with the IRS whenever a bank suspects or knows that a transaction of $5,000 or more is from illegal activities.

Why Do We Care About Currency Transaction Reports?

When law enforcement officials receive the CTR filings from financial institutions, they use them to track potentially illegal and fraudulent activities. The reports can make it possible for law enforcement officials to track down money laundering activities, drug trafficking, terrorist financing and tax fraud or evasion.

CTR Exemptions

In some cases, a financial institution may file a request with the IRS to exempt some of their account holders from currency transaction reporting requirements. It could be that the bank knows the nature of an individual’s financial situation, and it is not unusual that he or she would have transactions exceeding $10,000 in a single business day. Financial institutions request CTR exemptions from more than 60,000 people each year, but it is unknown how many of the applications are approved or under what circumstances approval takes place.

Can the IRS Find My Real Estate, Bank Accounts & Other Property?

David Mitchell — Wed, 13 Jul 2011 22:47:19 +0000

Many people attempt to “sneak one past” the IRS, but anyone who attempts to hide real estate, bank accounts or other assets that he owns is asking for trouble, plain and simply. The IRS has a number of tools and methods that facilitate the uncovering of an individual’s assets, and the risks involved in hiding these assets are just not worth it. This is particularly true in today’s technology-driven world, where information is easier to find than it has ever been before.

Here is a list of some of the tools and resources that the IRS has at their disposal for finding out all of the real estate, property and bank accounts that belong to individuals:

Nationwide Online Asset Locator

IRS employees have access to public records that the general public is not allowed to use. In fact, IRS employees are required to run a public record check on all taxpayers to discover assets. They use an online asset locator research tool, which uncovers real estate transactions, property owned, vehicles, boats, planes owned, and corporate information for business owners. Running a quick search with this tool will uncover many of an individual’s assets, and can also lead to finding cases of tax fraud or tax evasion.

Government Locator Services

The IRS and other government agencies can use locator service programs to find assets owned by a taxpayer. It is not available to the general public, so you cannot log in and obtain information about your neighbors; however, government employees who have the need to uncover information about an individual may tap into this huge database of details.

The Internet as a Research Tool

In addition to government-only tools, the IRS can jump online just like anyone else can to uncover more information about you than you probably expect. IRS employees have made use of Internet research to locate taxpayers and to find out what types of assets they own. It is also important to note that Internal Revenue Service employees are not above finding you on social media sites to track down your assets.

Credit Bureaus

The Internal Revenue Service retains the right to contact credit bureaus to obtain a taxpayer’s information if that individual is suspected of tax fraud or tax evasion.

Department of Motor Vehicles (DMV)

Because the DMV of every state requires owners of automobiles and other motor vehicles to get registered and legally mandates that the driver must have a valid driver’s license, the IRS can often use DMV records to track down taxpayers and their assets.

Real Property Records

When an individual purchases real property, a record of the purchase becomes available online. This type of record is frequently available through the courthouse website and can be accessed without having to go to the town hall in person, making it easy for the IRS to access it from anywhere. There are currently efforts being made to create a central database of real property records, which will enable IRS agents to search all records, nationwide, in one location.

Subpoena Power

Being a federal agency, the IRS has the power to subpoena information from third-party records. When the IRS has reason to believe that a company has information that they need about a taxpayer, they can get it via a summons enforcement. This may be used for credit records or loan applications so that the IRS can see what the taxpayer purchased or intended to purchase with that loan.

Connection to Businesses

The National Uniform Commercial Code filing records contain information about business-owned assets and about the relationship between an individual and a business. If you purchase property or vehicles, or own assets under a business entity, you can be sure that the IRS can and will make the connection between you and your business to discover any assets that may be hidden under your business name.

The Post Office

If the U.S. Postal Service can find you to deliver mail, then the IRS can find you as well.

Investigators

Many IRS employees are trained investigators who spend their days tracking down taxpayers and assets.

With all of these methods and resources available to IRS, there is little chance that an individual can purchase or sell an asset without the IRS finding out. Therefore, it is always in your best interest to report all of your property, finances and other assets to the IRS at tax time.

Tax Audit Defense: How to Defend Against an IRS Audit

Debra Dragon — Fri, 23 Apr 2010 13:05:12 +0000

Receiving an audit notice from the Internal Revenue Service is not something anyone would wish on their worst enemy but the reality is audits do happen and if you are knowledgeable and prepared, you can get through the audit and come out on the other side safely. The best way to start with tax audit defense is to understand your rights, dispel the myths, understand your appeal rights, and know help is available.

You have Rights, Learn Them

First, it is essential that you know you have rights. In fact, the more rights you exercise, the better off you will be. For instance, there are 3 main rules you need to understand before proceeding forward:

You have the right to:

Have the audit conducting during a time and at a place convenient to you. This allows you time to prepare and a place that makes you feel comfortable throughout the process.

Have the audit process recorded, provided the IRS is given the same right. Those who chose to record the proceedings do so because it guarantees the IRS representative will not change any of the rules during the audit.

Place limits on the extent of the audit and can cut out any issues that are not related to your taxes or tax liabilities. This helps to save time and frustrations across the board.

Dispel Audit Myths

IRS representatives have been known to play a good game of bluff. Many taxpayers fall for what is first told to them without ever questioning a thing. There are three very common bluffs/myths that can be dispelled right now to allow you more standing in the audit process.

The IRS may tell you:

Sorry, you can not claim a deduction without a receipt.

You are not allowed to challenge decisions made by the IRS auditor.

You have to provide the auditor with anything they want to know about your personal finances.

On all accounts, the three most common bluffs are indeed bluffs. You have every right to question the process you are going through, provided that it is a calm, reasonable manner.

Right To Appeal

If you go through an audit and eventually the auditor reaches a decision that seems unfair or unrealistic to you, you can bring the audit decision to a higher level known as the Right of Appeal. Most people think the decision is once and done and that the auditor is all-powerful and can promptly hit you with penalties or seize assets. The fact is that is not true and the IRS auditor really hasn’t much power at all. In the event an IRS auditor tries to collect more tax liability than you actually owe or denies you of any of your rights, you can not only appeal the decision, you may also recover any costs and fees associated with your appeal.

The audit process can be tedious and frightening but if you approach the process with knowledge of your rights, you will be less likely to feel strong-armed into decisions you do not agree with. By all means, you are to act responsibly and answer honestly about your information provided to the IRS, but don’t let a good bluff cost you more than you owe.

When Can I Stop Worrying About Getting Audited?

Manny Davis — Tue, 16 Feb 2010 12:53:00 +0000

Tax audits are becoming a more common occurrence these days as IRS computer systems are getting more powerful and efficient at detecting problems with tax returns. The IRS has a complex system that matches what taxpayers report on their tax return with what others claim to have paid those individuals (information returns processing system or IRP). Their computers also detect things that seem out of the ordinary by doing complicated statistical analysis on the numbers reported to determine if it is likely correct. This process can take several months to several years for the IRS to decide to audit.

Many times individuals realize that they may have fudged some numbers on their tax return and are worried about the chance of an IRS audit, and have a good reason to be. The standard time limit for the IRS to audit a tax return is three years. The clock on the three years starts running on April 15th of the year that the tax return was filed and was due. The time limit never stops if a tax return was not filed. There are several exceptions to this rule though. Sometimes this time period can be extended to 6 years and in certain circumstances there is no time limit for the IRS to audit a return. Below are these exceptions:

Income was understated by 25% or more: If this is the case, the IRS can audit the return up to 6 years after the due date if they find that income was significantly under reported.
The tax return was fraudulent: If the IRS determines that the tax return was file fraudulently then there is no time limit to them being able to audit the return. Filing a fraudulent tax return means that you filed the return in order to deceive the IRS. Many times there is a fine line between it being fraud and negligent. The IRS must prove fraud if they don’t believe it was filed negligently.

Most likely, if you are going to receive an audit notice it will be between 1 year to 1 and a half years after the tax return was filed. The IRS wants all audits to be completed within a two year period after the return has been filed. The IRS requires that they get done early because of the possibility of individuals filing appeals and documents getting lost etc. The IRS wants to make sure all audit cases are done before the three year period is up. If it takes longer than three years the person that is being audited will no longer be liable if there was wrong doing on their part.

If you have been selected for an audit and you know that you have done something wrong then it is a good idea to get tax audit help. Tax code is complex and there is always the possibility that your error can be offset by some other deduction that you may have missed. Tax audits can be stressful and time consuming which is why it can be a good idea to have professional help.

Common IRS Audit Red Flags

Manny Davis — Mon, 21 Dec 2009 13:26:56 +0000

There is no definite way to avoid an IRS audit. That being said, if you know the red flags for an audit you can do your best in becoming a victim.

During an audit the IRS is making a determination on whether or not your return(s) is accurate. Most commonly, deductions are looked at closely.

Here are several IRS audit red flags to avoid:

Claiming too much in charitable donations will throw up a red flag in no time at all. While this is true, as long as you have all your receipts there is nothing to worry about. Make sure you always ask for proof of a charitable deduction. If you don’t have a receipt don’t claim it on your tax return.
Are you self-employed? If so, the IRS is going to keep a close eye on your deductions. They know that self-employed professionals like to stretch the truth in this area, so make sure all of your deductions are 100 percent legitimate.
Those who earn more than $100k/year are closely monitored. Of course, there is nothing you can do about this. You don’t want to make less money just so you can stay out of the eyes of the IRS – this does not make any sense.
Any inconsistencies are going to trigger a red flag. Some of these are easy to avoid, some not so much. For instance, a name change is an inconsistency but in most cases this is not something that can be avoided.
A large change in income. Maybe you earned $300k this year but only $100k last year. While there is nothing wrong with earning more money you should be well aware that this can trigger an IRS audit.
Federal and state returns that do not match up. You don’t want to claim one income number on your federal return and another on your state return. This is going to look very suspicious in the eyes of the IRS.

To avoid an IRS audit you should attempt to avoid all of these situations, while also making sure that your deductions are accurate. On top of all this, be sure to save documentation to back up all of your claims. This way if you are audited by the IRS you can prove no wrongdoing. Remember that audits can go both ways and even if they do find something to use against you it could be possible to find something else to negate the effect. If you are being audited, consider getting IRS audit help.

HP Receives IRS Notice About Back Taxes

Manny Davis — Tue, 08 Sep 2009 20:45:51 +0000

HP or Hewlett-Packard is facing some tax problems as the IRS is claiming through a “notice of deficiency” that they owe around $95 million dollars from 2004-2005, with about $90 million in principal, and $5 million in penalties according to the Financial Times. This is interesting as HP has won previous contracts in the past to supply the IRS with computers. This is just another IRS vs. major company case as UBS and Nortel are just some of the major names that have run into troubles with the IRS.

The recent claim against HP stems from a tax audit that was done for previous years and recently completed. The SEC reported they were getting audited for previous years taxes but it seems that the IRS went further back. Overall, if the IRS rejects HP’s claims about how they reported, the result would lead to another $560 million lost in years to come. Earlier in the year, the IRS was challenging HP for a transaction it made with AIG overseas regarding tax benefits received.

Further details will probably be released later but again this shows how the IRS is struggling with declining tax revenues and looking for ways to boost income. Companies and individuals need to find the IRS if they are not in compliance before the IRS finds them.