Red Flags Abound for Potential IRS Audits
Let’s face it. Getting audited by the IRS is about as pleasant an experience as going to the dentist.
Which is why you should know which red flags trigger the IRS audit process.
The IRS chooses its audit targets for a variety of reasons. Sometimes they’re chosen because they’ve been compared to a statistically valid set of other returns, and they stick out.
Other times, it’s because taxpayers or businesses make the wrong decisions, the red flags are raised, and the tax man cometh.
Here’s a few below.
Big Cash Transactions
If you run a cash-based business, it can be tempting to not report all of your income. It can also be tempting to pay for big expenses and expensive toys with a whole load of greenbacks.
But paying for big expenses with cash is just the kind of tipoff the IRS is looking for. Cash payments exceeding $10,000 have to be reported to the IRS. So are multiple cash payments that add up to that amount.
Car dealerships, banks, and casinos won’t keep these types of transactions on the hush hush. Big cash transactions are akin to suspicious financial activity, so beware that the IRS will find out – and come auditing.
The IRS keeps track of as many individuals’ income as possible. It’s done through the use of sophisticated computer systems. One of them, called the Automated Underreporter Program, matches your tax returns with information provided by third parties.
It’s helped the IRS recoup billions of dollars. So if you open that brokerage account but don’t tell Uncle Sam, Uncle Sam may come knocking on your door to audit you.
Making A Lot of Money
Just making a lot of money can increase your chances of getting audited.
Chances are if you’re making more than $200,000 a year, your audit risk rises from 1 to 4 percent. If you’re making more than $1 million, you have a 1 out of 12 possibility of getting to know an IRS agent.
Businesses also have a good chance of getting audited if they have significant assets. There’s a one percent chance of a corporation getting audited if its assets are less than $10 million, but a nearly 18 percent chance if total assets exceed that.
The rationale is that where there’s bigger assets or revenues, there’s more complicated tax maneuvers that warrant government interest. Working with a tax professional or tax attorney is the first step toward keeping the IRS’s auditors at bay.
While red flags that trigger IRS audits can’t be eliminated, they can be managed with the right help from the right tax professionals. As the old saying goes, better to spend a little now, to save a lot later.