Pretty much any kind of correspondence from the Internal Revenue Service (IRS) is enough to ruin at least lunch. Receiving notice of an IRS civil tax audit can send a quiver of anxiety through anyone. To provide a heads-up on avoiding tax controversy, we’re going to talk about common triggers of civil tax audits.
Our tax attorneys work with clients on civil and criminal tax matters of all kinds. Given the nature of the questions asked during an audit, it is often possible to pinpoint the audit trigger. Sometimes the cause of the audit is clear, like failure to file, submission of a false tax return, or something relating to an offshore tax holding or foreign bank account.
According to the IRS, most returns are not audited. For those who knowingly file with sketchy figures, this “audit roulette” can bring your name to the top of the pile for reasons that include:
- The high and the low of it: Individuals with income that is almost entirely wiped out by deductions risk being tagged for an audit. The IRS notes that 0.8 percent of those with income under $25,000 were audited in 2016, while 18.79 percent of those with income over $10 million received notice of an audit. It makes sense that the IRS, with fewer resources, is more likely to go after a greater number of high wealth individuals who may be sheltering hidden assets.
- Freelance, gig, and self-employed: Tax fraud related to underreporting 1099 income is a hot button. The IRS receives copies of W-2 and 1099 Forms. When your numbers do not match up with theirs—it is a problem.
- Family fallout: Child support, alimony, and asset settlements during divorce can call attention to your returns.
- Deductions: A significant number of deductions can trigger review of your return. From home offices, and business expenses, to charitable contributions, be sure you can back up what you claim.
- Business losses: The IRS is clear that your risk of audit “increases as gross receipts rise.” Report income and keep careful records to substantiate losses you take on your business.
- Whistleblowers: Whether from a disgruntled employee, customer, angry ex-spouse, or “anonymous,” the IRS routinely receives information referrals on others who may not be paying their share. In larger cases, whistleblowers can be in line for a financial award, raising the stakes that someone with knowledge of a tax crime will report it to the IRS.
In other cases, IRS computer algorithms pull conflicting numbers from a return for further review, or the record of bank deposits received by the IRS outstrips your obvious avenues of income. Unskilled or fraudulent tax preparers also lead to IRS audit notices.
For a high revenue business or if you have substantial wealth, speak with an experienced IRS tax lawyer if you receive notice of an audit. While it could be an honest mistake, a good tax attorney can help keep it from looking like a tax crime.
Talk to a knowledgeable IRS tax lawyer in Chicago
The law offices of Robert J. Fedor, Esq., LLC provide strategic legal representation on civil and criminal tax charges or other tax controversy. When you become aware you are under investigation, or receive a notice of tax audit, call us at 800-579-0997.