What Attracts an IRS Audit?

While many taxpayers fear the dreaded IRS tax levy or wage garnishment, perhaps the most feared tool of the IRS is the audit. A recent article in CBS MoneyWatch discussed certain key factors that could trigger an IRS audit. According to the article, the IRS examined a very small percentage of all individual tax returns in 2010 and 2011. The number reported was a little over 1%, which means that your chances of being audited are somewhat slim. It is important to keep in mind though that your chances increase dramatically depending on several factors: your income, types of income, the amount you deduct, and changes that you have made since filing your last tax return.

IRS computer systems check each return for small errors—mathematical errors or clerical issues— and then notify taxpayers if an error is found and if additional tax is due. The IRS also uses information that you report from your bank or forms like your W-2 to compare the amounts you report on your return. In all likelihood, if any mistake is made in reporting, the IRS will detect it and, once again, recalculate the tax due. Any penalties and interests that are applicable will also be added to your tax bill.

In addition to the checks provided by the computer systems of small in calculation or reporting, the IRS has several new items to which it has begun to pay attention, including payments made to business by credit or debit cards and investments that are sold by their investors. Credit or debit card transactions are reported by banks or other entities each month, which means that accurate reporting of transactions by the business receiving payments is essential.

Each return is assigned a particular numeric weight through a system that gives points to certain characteristics of the return. A return then receives a composite score from the addition of the weights. The score of your return is compared to the national average score dictated by the Internal Revenue Service. If your score is higher than the average, your return will be flagged for a possible audit. The IRS will not officially discuss what items it focuses on and what numeric weight certain characteristics receive, but the article offers several points that are believed to be scrutinized:

1. Large amounts of income not subject to withholding

2. Indicating a change of address when your home-related expenses stay the same and there has been no reported sale of your residence.

3. Large charitable contributions and expenses for home office, travel or entertainment

The article admonishes taxpayers not to fear audits. If you find yourself being notified of an audit, contact an IRS tax attorney immediately.

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

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