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Audit Red Flags

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Sandy Botkin
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Since we are coming to the end of the year soon, filing tax returns will be on everyone’s mind. Will the audit rate is low for any one year, the chances of being audited in a twenty year period, especially if you have a business, is about one in three. Yes, it can be that high! The key is that your chances of “winning” the audit lottery escalate depending on various factors, including the complexity of your tax return, the amount of deductions and other tax breaks taken, your income and whether you happen to be in business. Thus, I thought I would do a multi-part series on audit red flags and things you should do if you do get audited.

Here are some factors that increase your chance of being invited for a chat with the IRS:

1Failing to report all your taxable income from wages, dividends, pensions, IRA distributions, Social Security benefits and other sources of income. IRS gets copies of all W-2s and forms 1099s. If your tax return doesn’t match what these forms show, IRS will investigate.

Note: Be sure to report any earned income even if you don’t get a form 1099 such as funds received for tutoring, driving for Uber, or selling items on Ebay.

2Claiming big deduction or other tax breaks is another “red flag.” Having higher than normal expenses will NOT automatically result in an audit; however, if these expenses are disproportionately large when compared to income, the audit risk goes up.

Note: If you have big ticket items, attach a schedule explaining the deduction by breaking it down to smaller amount with an explanation. Thus, if you simply put down $25,000 as a deduction for dental expenses, you will probably receive increased scrutiny. However, if you attach a schedule breaking down this expense showing that you incurred $16,000 for orthodonture for your children and $9000 for periodontal surgery for you and your spouse, IRS might feel that this is reasonable and not audit you. 

3Failing to sign tax returns or failure to include all schedules. Amazingly, one of biggest red flags , according to the IRS, is failure to sign tax returns or include the right schedules for everything. If you don’t know what you are doing regarding preparation of tax returns, use an expert. Don’t depend on Turbo Tax!! I can’t say this enough. 

4Lost returns: It is astonishing how many tax returns get lost when sent to the IRS. My dad has a friend who sent his return with a $15,000 check. The return and check got lost in the mail and my dad’s friend had to resend the return and was hit with $11,000 of additional interest and penalties.

Key: Always send in your tax return either electronically or using a tracking services such as Fed Ex or UPS particularly if you owe money. 


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