Q & A and Tips on Accounting, Taxes and Personal Finance.

IRS Audit

February 22, 2016 | By More

IRS-auditWhy is the IRS auditing me?

Did I cause my tax return to be audited?

How can I prevent or at least minimize the potential of being audited?

These are all questions that are asked when a taxpayer receives the dreaded letter from the IRS.

Let’s start with what constitutes an audit by the Internal Revenue Service. There are basically three types of audits or exams as the IRS likes to refer to them.

The first is a letter audit, or notice, that is generated by computer and is the most common type of audit. The computer matches information that the IRS receives from third parties with the information submitted on your tax return. Something as simple as a misspelled name or a wrong social security number will generate such a notice. Omitting W-2 wages, interest or dividend income or sales of stock, information all provided to the IRS by 1099’s, will also generate an IRS notice. These notices generally suggest that there is an error or errors and provide a corrected tax liability. It’s up to you, the filing taxpayer, to provide proof that the information that the IRS has used to correct your tax liability is incorrect or agree to the changes and pay the additional taxes on the notice.

The second type of exam is an office exam conducted by a Tax Compliance Officer or TCO. These exams are generally conducted at the local IRS office. You will receive a notice from the IRS requesting that you appear before them. The notice will contain an Information Documentation Request, an IDR, that will stipulate the documentation required to validate the information that was provided on your tax return. It could relate to your income or expenses reported on your tax return.

The third type of exam is a field exam conducted by a Revenue Officer or RA. These exams are generally conducted wherever your books and records are located such as your place of business or your home. A Revenue Officer field exam is usually more detailed and in depth and can take several days to weeks to conduct.

Now that you know what constitutes an audit/exam, you’re asking yourself how can I avoid or at the very least, minimize the possibility of one? If I am examined, can my tax return survive the scrutiny? What are some of the Red Flags?

  1. Whether you prepared your own tax return or had a professional prepare it, be sure and proof read it. Make sure all names are spelled correctly and match those that are on your social security card. This also holds true for any dependent that you claim.
  2. Compare each line of this years tax return with last years tax return. Make sure you understand any big changes.
  3. Report all income:
    Make sure you report all W-2s, W-2G’s and 1099s from interest, dividends and capital gains.
    Report all stock sales even if you had a loss.
  4. If you itemize your tax return:
    Make sure all medical expenses are paid by you in the current year.
    RED FLAG: High medical expenses and high insurance premiums could trigger an exam.
  5. Be sure your mortgage interest matches the 1098 form(s) that you receive. The government also receives a copy.
  6. Obtain receipts for charitable deductions. Be sure the receipt has a statement on it that states
    “No goods or services were provided in exchange for this donation”.
    RED FLAG: Charitable deductions that are disproportionately large compared with your income
    could trigger an exam.

BRIGHT RED FLAGS that could trigger an examination are sole proprietorships, rental property, unreimbursed employee expenses. Be sure you have the proper documentation.

DYNAMITE!! Failing to report a foreign bank account or foreign brokerage accounts. This is currently a top exam priority with the IRS and can lead to severe penalties.

If you are providing information to a tax professional, be advised that there are no lines on a U.S. Federal tax return where you can put information such as: I guess, about, around, approximately, could be, use the max or the same as last year.

Remember, if you are actually examined/audited: Just like the three most important words in real estate are location, location, location; when preparing your taxes it’s documentation, documentation, documentation. Be prepared to provide verification of all deduction that you took on your tax return. Bank and credit card statements alone are generally insufficient. They tend to lack descriptions as to what was purchased for what and for whom. Obtain and save purchase receipts for products purchased and services rendered.

Don’t rush, file an extension if you need to. Mistakes are usually made when you’re in a rush.

Contributed by Irwin A. Rozen – Enrolled Agent, ATA
I A Rozen & Associates, LLC is located in Deerfield Beach, Florida. For more information or to contact Irwin A. Rozen, visit http://www.ataxpro.net

Article information should not be used exclusively to make legal, financial or tax decisions. Because laws and rules can change frequently, topics may not always be updated to reflect these changes or may not apply to your unique situation. It’s prudent to seek out the advice of a professional for your specific needs.

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Category: IRS Problems

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