We reported in a recent blog about how budget cuts at the Internal Revenue Service are expected to adversely affect the agency's ability to service taxpayers this year. While it's likely such cuts will also impact the agency's ability to conduct tax audits, taxpayers would still be wise to become informed about what types of activities are most likely to trigger an IRS audit as well as, if audited, how to avoid costly penalties or even criminal charges. While the IRS isn't forthcoming about how the agency determines which taxpayers to audit, there are a lot of speculation and theories. Among some of the most legitimate are those based on statistical data that relates to high income earners, small business owners and foreign account holders. Individuals who report higher earnings are statistically more likely to be selected for an IRS audit. In fact, data shows that roughly one in nine individuals who report incomes of $1M or higher will be audited. Even individuals who aren't millionaires, but report incomes of $200,000 or more are nearly three times more likely to be audited than an individual who earns less than $200,000.
Another likely audit trigger is owning your own business. This is especially true of businesses that are registered as limited liability companies, sole proprietorships, partnerships and S corporations. Additionally, businesses that are cash-based often receive extra attention from the IRS due to the increased probability of income reporting errors.
Individuals who have assets held in foreign financial institutions outside of the U.S. are also likely to receive special scrutiny from the IRS this year. With the enaction of the Foreign Account Tax Compliance Act, U.S. citizens with foreign assets in excess of $50,000 must file certain tax forms. Additionally, foreign banks and financial institutions are required to provide information related to qualifying U.S. citizen-held accounts. In cases where a U.S. foreign account holder fails to comply with FATCA, he or she may face hefty fines and, depending on the circumstances, criminal tax evasion charges.
When it comes to the IRS and audits, there are no guarantees and tax law can be confusing. It's best, therefore, to always be prepared and take steps to ensure all income sources are accounted for and one’s financial records and tax documents are accurate. Individuals, who fail to take such steps and are facing an audit, would be wise to consult with a criminal defense attorney who handles IRS tax matters for tax audit help.
Source: Kiplinger, "14 IRS Audit Red Flags," Joy Taylor, November 2014
