Anyone can be audited by the Internal Revenue Service (IRS), and indeed, some taxpayers are selected entirely at random. However, most IRS tax audits are triggered by discrepancies, known as “badges of fraud” or “indicators of fraud,” in a taxpayer’s or business’ statements, transactions, or financial documents. As many business owners are dismayed to learn, even a factor as seemingly arbitrary as the industry you work in can increase your risk of an IRS audit. Read on to learn more about common red flags that increase your likelihood of being chosen for an IRS audit this tax season – and if you’re worried that any apply to you, you should contact an experienced tax audit attorney immediately. The sooner you begin preparing for an audit or eggshell audit, the easier it will be to minimize the financial damage – not to mention the potential for criminal charges.
3 Red Flags that Increase Your Risk of an IRS Tax Audit
It’s that time of year for taxpayers again. Federal income tax returns are due on Tuesday, April 17, 2018 – and with its recent hire of approximately 700 auditors (in the midst, no less, of an agency-wide hiring freeze), the IRS seems to be gearing up for one of its busiest, most aggressive audit seasons in years. Thus, taxpayers are advised to pay special attention to the following audit risk factors:
- Badges of Fraud – According to Internal Revenue Manual (IRM) 25.1.2 (Recognizing and Developing Fraud), some typical badges or indicators of fraud include omitting sources of income, failing to report income, personal expenses disproportionate to income, failure to report bank accounts (foreign or domestic), and falsely padded deductions (fraudulent write-offs). For more detail on this subject, see our articles discussing how IRS agents detect fraud when auditing taxpayers – and how indicators of tax fraud turn into criminal charges.
- Cash-Based Businesses – The IRS’ position is that dealing primarily in cash creates greater opportunity for abuse of the Tax Code. Thus, business owners who operate cash-intensive companies are automatically at heightened risk – even if they have been perfectly compliant. Dental tax audits, car dealership tax audits, restaurant tax audits, and convenience store tax audits are especially common.
- High Income – Unfortunately, simply being a high earner increases your risk of being singled out by an auditor. Audit risk by income level varies dramatically according to data compiled by the Tax Foundation, a D.C.-based think-tank that researches state and federal tax policy, which has noted, “Almost 35% of households with over $10 million in adjusted gross income were subject to an IRS audit in 2015, compared to 0.47% of households with between $50,000 and $75,000.” The same report noted that 8.4% of households with $1 million to $5 million in income were audited, in addition to 19.4% of households with income between $5 million and $10 million. While it may seem counterintuitive, reporting no adjusted gross income also increases the risk: about 3.8%, compared to just over 1% for households with income up to $25,000, and only 0.5% for households with income between $25,000 and $50,000. The Tax Foundation drew these audit statistics from the IRS Data Book, 2015.
Tax Attorneys Providing IRS Audit Representation and Egg Shell Audit Defense
The very word “audit” is enough to strike fear into the hearts of taxpayers – especially those with less-than-perfect track records of compliance with the Internal Revenue Code. If you are worried about being examined by the IRS this tax season, it is in your best interests to consult with an experienced and effective tax attorney or tax preparer as soon as possible. If you have already received an audit notice from the IRS, the need for swift and aggressive action is even more urgent.
Whether you are concerned about (or have already been selected for) a correspondence audit, a field audit, an office audit, an egg shell audit, a tax audit of your cash-intensive business, a sales tax audit, a foreign account tax audit, or a different type of audit-related tax issue, turn to the Tax Law Office of David W. Klasing for experience-driven, results-oriented, client-focused representation at all stages of the audit process, including IRS appeals representation. Whether you need a tax preparer to ensure that your returns are handled appropriately, a tax controversy lawyer to help you resolve a dispute with the IRS, or a criminal tax defense attorney to defend you against charges arising from an audit or egg shell audit, our award-winning team of tax professionals is ready to provide the skilled and sophisticated service that has come to define our nationally-recognized practice.
To learn more about the tax audit services we provide for California residents, out-of-state taxpayers, and international taxpayers and expats, contact the Tax Law Office of David W. Klasing online, or call us today at (800) 681-1295 for a reduced-rate consultation.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.
Here is a link to our YouTube channel: click here!
Here is a link to our practice overview video on warning signs that an audit has gone criminal.
What is an effective tax defense in an IRS eggshell tax audit?
https://www.youtube.com/watch?v=7qixPqWTtvA
So, you cheated on your taxes and you are under a tax audit…
https://www.youtube.com/watch?v=FZce4jqQJpI
Why should I hire a tax attorney to represent me in a tax audit?
https://www.youtube.com/watch?v=NDwc4GUfBX8
Foreign income and information non-compliance
https://www.youtube.com/watch?v=g2UlIE8oxPA
Self Help – Q and A libraries:
https://klasing-associates.com/topics/audit-representation-faq/
https://klasing-associates.com/topics/foreign-audit-faq/
https://klasing-associates.com/topics/ovdp/
https://klasing-associates.com/topics/criminal-tax-representation-faq/
https://klasing-associates.com/topics/employment-tax-representation-faq/
https://klasing-associates.com/topics/internet-online-business-tax-faq/
https://klasing-associates.com/topics/car-dealership-faq/
https://klasing-associates.com/topics/assisting-cpas-with-client-criminal-tax-exposure-faq/
https://klasing-associates.com/topics/non-filer-assistance-faq/
