THE IRS was underfunded under the Trump Administration. It didn’t have enough personnel to accomplish its goal. With skeleton force, audit rate declined to only 1/2 percent (less than half the returns they audited in 2010). Even with super low rates, you may still be a target if your tax return contains red flags. Let’s discuss how you can reduce your own red flags.
Unreported income
Your employer and financial institutions send you W2s and 1099s that have to be reported. If you don’t, you get a notice of unreported income simply because IRS received such forms from entities who paid you. Be organized and make sure that you provide complete records to your tax professional. One innocently missed 1099 could lead to a ghastly audit.
Excessive deductions
The IRS maintains statistics on all taxpayers and compares your data to average deductions of taxpayers at your income level. If you claim disproportionately high deductions as compared to your peers, the IRS may want to verify the data on your return. Large donations or excessive home office deductions can lead to IRS scrutiny.
Deducting personal expenses on your business return
Many business owners have difficulty distinguishing between personal and business expenses. But other businesses also deliberately disguise personal as business expenses. IRS is always on the lookout for personal meals, entertainment and travel expenses posing as legitimate business expenses.
Cash industries
If you own a business that operates primarily with cash, your return is more likely to be targeted for an audit. Cash is hard to trace and is a major cause of the tax gap (unpaid taxes). Think swap meets or the produce section in downtown Los Angeles.
Tax return errors
This is not as common as it used to be in the days of manually prepared tax returns; however, transposed figures of Social Security numbers or employer identification number can still get you into trouble. So, behave.
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Victor Santos Sy, MBA. CPA (Retired)
Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation.
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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits” that’s available at Amazon. Readers may email tax questions to [email protected].
