We all know how aggressive the IRS can be when they collect money that is due them; but did you know there are specific “red flags” that mark tax returns for additional scrutiny?
When deciding who will undergo an IRS audit, they use a computer generated DIF score; which stands for the “discriminate function” system. The DIF score is a statistical profile that compares the tax numbers (income, expenses, and deductions) on income tax returns with numbers generated using national statistics for tax payers in a similar income tax bracket.
The formula the IRS uses to compute a DIF score is a secret but the following “red flags” may make a person’s tax return more likely to be audited:
1. Failure to report income. The IRS receives copies of all W-2s, 1099s, and other income reports that people receive. Failure to disclose any, or all, income will make your return stand out.
2. Claiming false business expenses. Excessive home office deductions, claiming 100% of a vehicle for business, and trips that have only the most tangential business reason can all be flags for an IRS audit especially if you are claiming big expenses in proportion to earnings.
3. Sloppy or incomplete tax returns or no return filed. If the IRS has to spend time sorting out a return or a return is filed late with no tax paid, the IRS will most likely take a very close look.
4. Excessive charitable donations without documentation. Make sure you have receipts or acknowledgement letters that state the donation amount from any charitable donations.
5. Unreported foreign accounts. Non-reporting of foreign accounts or incomplete reporting of assets overseas will also send a red flag to the IRS.
Even if you have not done any of the above, you may still be subjected to an IRS audit. If you do get audited, I recommend hiring a qualified tax professional to help you through the auditing process.
About Michael Rozbruch, CEO and Founder of Tax Resolution Services, Co.
Michael Rozbruch is one the nation’s leading experts on solving individual and business IRS tax problems. As a Certified Tax Resolution Specialist (CTRS), CPA (licensed in the state of Maryland), and member of the American Society of IRS Problem Solvers, he and his company have represented thousands of taxpayers who owe the IRS, but simply cannot afford to pay. Michael has been a guest speaker on over 200 radio stations across the country and has been interviewed on numerous TV news programs as a nationally recognized expert guest speaker.
Tags: Business Taxes, foreign accounts, irs audit, Payroll Taxes, Tax Return Mistakes
