Nobody wants to see a letter from the Internal Revenue Service (IRS) requesting the pleasure of their company at a tax audit. If you are interested in avoiding IRS scrutiny, it is a good idea to understand the pitfalls that may land you on the receiving end of an IRS audit letter.
Out of the gate, the IRS explains that audits ensue for a number of reasons. Of these, it is important to keep in mind that the IRS may tap your return for an audit if you have business associates or partners who have been audited. As well, the IRS describes a vague algorithm noting “random” selection and the use of formulas that compare tax returns for “norms.”
IRS audit triggers
Beyond the opacity of algorithms, there are solid reasons your return could be flagged for an audit. Here are some of those reasons:
- Mind the math: Needless to say, if there are mathematical errors on your tax returns and any documentation, it will not help you stay under the IRS radar. Ensure your tax return is correct, signed, and documented as needed when originally submitted.
- Asset valuation: Take a sharp look at asset values and estate tax returns that you file. Well-experienced with tangible (and crypto) values, your return could attract attention if less effort is provided on valuing assets. Consider using several truly qualified appraisers, and if there is a wide disparity in values, use your appraisers to help you explain the gap.
- Deductions: There are a few straight-out red flags regarding deductions. Business deductions for a home office are frequently abused, so be sure you can support what you claim. The same goes for charitable deductions. Make sure donations are legit and do not exceed 60% of your adjusted gross income. Be cautious if other thresholds apply.
- Business losses: While claiming a business loss is not unusual, a business conducted at a perpetual loss can put you on the short for an audit. Review what you claim with an eye as skeptical as the IRS.
- Inaccurate income figures: Big swings in income and non-reported income are an easy way to land in a discussion with the IRS about your return. While income for a business or an individual taxpayer may go up and down, big peaks and valleys attract attention. With regard to unreported income? The IRS has an exquisite tool for collecting income information called the Automated Underreporter (AUR). While the AUR may not catch money laundering or offshore tax scams, it may turn up information that leads to further investigation. Recheck your figures—and again, make sure you can support what you did—and did not report.
And remember, when you sign on the bottom line, regardless of who prepares your return, you are responsible for its accuracy. If you know your return has “issues,” speak with an experienced tax attorney before you file.
Knowledgeable legal representation when challenged by the IRS
If you do receive an IRS tax audit letter, or wonder about ADR options, or tax litigation, our tax lawyers are here to provide strong, experienced advice. For discreet and strategic representation, reach out to us at 440-250-9709 or schedule a consultation. We serve both domestic and international clients, with offices in Cleveland and Chicago ready to support you in resolving your tax matters efficiently.
For a deeper dive on IRS audits, check out our free eBook, A Tutorial on IRS Audits.
