How to Tell If You Are Likely to Be Audit Target
Source: El Paso Times
Publication date: 2009-03-02

By Carolyn Mora, El Paso Times, Texas

Mar. 2–Few things are more unnerving than having your tax return selected for an IRS audit. The Treasury Department has a sharpened focus on generating additional tax revenues.

The IRS evaluates tax returns based on their “DIF” scores, a set of IRS formulas known as the “Discriminate Function System.” About three-quarters of all audits are selected by the DIF computer, which compares deductions, credits and exemptions with norms for taxpayers in each income bracket.

While these formulas are kept secret, you can count on having a higher audit probability if you fall into certain categories or report certain things on your tax return.

Some higher risk areas include the following: –Tax protests. Both the IRS and tax courts are getting fed up with what they consider frivolous tax protests. If you file a return stating that you owe no tax because the dollar is worthless or make some other such protest, you’ll probably be audited.

–High income. Auditing higher-income taxpayers is likely to produce more additional tax revenue than auditing lower-income taxpayers.

–Certain occupations. Taxpayers whose occupations produce cash income, such as taxi drivers and waiters, run a higher risk of being audited. Self-employed individuals, particularly independent contractors, are IRS targets for the same reason.

–No preparer. If you have a complex return and prepared it yourself, or if your return was prepared by someone on the IRS’ problem-preparer list, you are more likely to be audited.

–Certain deductions. The IRS has found it profitable to audit returns that claim office-in-the-home deductions, travel and entertainment deductions and certain other write-offs.

–Related party transactions. Paying wages to your children, lending money to relatives, splitting income among family members or running a family business will arouse IRS attention.

–Abusive tax shelters and offshore accounts. In the past few years the Internal Revenue Service has detected a proliferation of abusive trust tax evasion schemes. It also believes some people are using offshore credit cards to evade paying U.S. income taxes. It intends to expand its efforts to crack down on abuses in these areas.

Unless there is suspicion of fraud or substantial understatement of income, the IRS has three years from the due date of your tax return to initiate an audit. Typically, most returns are selected within two years of their filing date.

The best defense is a two-part strategy: (1) Have supporting documentation for all deductions and credits, and (2) see your accountant immediately upon notification that you are being audited.

A professional can put your mind at ease, can find the information that the IRS wants more quickly than you can, and very likely will save you money in the long run by getting a faster and more favorable conclusion to the audit.

Carolyn Mora is a certified public accountant and financial consultant in El Paso. She may be reached at 577-0926 or by e-mail at carolyn@elpasocpa.com

—–

To see more of the El Paso Times, or to subscribe to the newspaper, go to http://www.elpasotimes.com.

Copyright (c) 2009, El Paso Times, Texas

Distributed by McClatchy-Tribune Information Services.

For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

A service of YellowBrix, Inc. Publication date: 2009-03-02

© 2009, YellowBrix, Inc.

By utilizing the content on this page, you agree to the legal terms.

 

Subscribe in a reader