Red Flags! Learn What IRS Auditors are Looking For Wouldn't it be great to know what the IRS is searching for? Most taxpayers are unaware of what triggers an IRS audit. Tax professionals call these "red flags"? or items that the IRS looks particularly closely at. Here are some great tax tips for avoiding possible confrontation with the IRS! 1. Does your business handle a lot of cash? Whether you are a hairdresser or an independent contractor, if you do a lot of your business in cash, the IRS may be looking more closely. Keep good receipts. 2. Lifestyle VS. Income Do you live a champagne lifestyle on a beer budget? The IRS looks closely at people who own huge houses and fancy cars, but claim a low income. Many taxpayers get "caught"? this way. Don't drive up to the IRS building in a Porsche and an Armani suit if you only claimed to have earned $15,000 last year. Auditors are trained to spot taxpayers that are living above their reported income. 3. Are you paying your payroll taxes? The IRS will check if you are paying your payroll taxes if you have any employees. 4. Do you take lots of travel deductions that seem "Questionable"' Do you claim a lot of golfing trips, or vacations as business expenses? Better to have proof. Such as: attendance of a business conference, or meeting with a client. Business owners often travel to exotic locations for legitimate business reasons"?if you attend a meeting or conference, keep the badge and registration information, and make sure the conference has a legitimate business use for your line of work. You can legally mix business with pleasure-- you just better have a legitimate business reason for being on your business trip in order to deduct the expense. The IRS keeps a range of deductible expenses. If your income is only $25,000, but you claim $30,000 in medical expenses, the IRS is going to question the deduction. There are many reasons why your deductions may be legitimate, and if they are, do not be afraid to deduct them, but make sure you keep your receipts. High income earners are most often targeted for IRS audits. Audits cost money, and the IRS likes to audit taxpayers who may increase their chance of higher tax revenues and penalties. Taxpayers with income over 100,000 have a 1 in 20 chance of being audited. The likelihood increases with every "red flag"? found on the taxpayer's return. The best advice for any taxpayer is to obey the law. If you feel that a deduction is questionable, call the IRS directly, and keep a record of the call. If you are still unsure, contact a tax professional. When in doubt, keep all your receipts, and never throw away any important tax papers until after three years have passed. Unless there is evidence of tax fraud, this is the furthest back the IRS can audit your returns. |
