At the Tax Law Office of David W. Klasing, we frequently write about tax audits – and with good reason. Even with its operating budget at a low point, the IRS still manages to audit around 1 million individual and corporate tax returns every year, and no taxpayer is too small – or too successful – to be targeted. From college students and small family businesses, to celebrities, politicians, and Fortune 500 companies with billions of dollars in assets, no one escapes the IRS’ microscope (including its own employees). With the 2020 tax season quickly approaching, our IRS audit attorneys have rounded up three more reasons the Internal Revenue Service might choose you or your business for a federal income tax audit this year. For more tips on what to watch out for this tax season, read about these IRS red flags, or weigh your likelihood of being chosen for a tax audit in 2020.
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3 IRS Audit Triggers to Watch Out for When Filing Your 2019 Income Tax Returns
In our original article, we started with three common reasons the IRS will audit you:
- The IRS finds “badges of fraud” when processing your tax return. After you submit your tax return, the IRS notices or receives information that sets off alarm bells that indicate tax evasion – for instance, information about an undeclared foreign bank account. This sort of data could come from a foreign bank or financial service that you use, compelled by FATCA or a summons; from a public source of information; or even from a tax whistleblower hoping for a reward. Alternately, your tax return could score poorly on the IRS’ Discriminant Inventory Function System (DIF), indicating potential fraud and thus triggering an audit – or a criminal tax investigation.
- You operate a cash-intensive business. Since cash has been historically used to mask tax evasion, cash-intensive businesses (such as pawn shops and restaurants) endure intense IRS scrutiny. Talk to our tax audit lawyers for cash businesses if you are concerned about a potential examination or recent IRS notice.
- You earn a high salary or are a high net worth individual. The higher your earnings or the greater your wealth, the more likely you are to be impacted by complex tax regulations – and in turn, the more likely you are to be audited by the IRS. We’ve previously written about this issue here.
Unfortunately, the audit triggers don’t stop there. In our follow-up, here are three more reasons to be worried about a federal tax audit this year – including some triggers you might not have known were actually IRS badges of fraud.
- You didn’t report your cryptocurrency gains. Did you make unreported transactions using Bitcoin or other virtual currencies in 2019? You may be required to report Bitcoin to the IRS – which, taxpayers should be forewarned, can track “anonymous” cryptocurrency around the world.
- You didn’t report your Goldmoney holdings. You should report Goldmoney holdings to the IRS if (1) you made cash transactions above $10,000, which must be reported on Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business); or (2) if your account meets FBAR reporting requirements, discussed in greater detail here. Failure to report income or financial accounts is a glaring badge of fraud, as is structuring transactions to remain below $10,000.
- You claimed large charitable tax deductions. Did you donate money to a charity in 2019? Provided you meet IRS criteria, such as choosing a “qualified” charitable organization, you may be able to deduct your contribution – but be careful. If your deductions are higher than average for a taxpayer at your income level, the IRS is certain to take notice. The risk is especially great for taxpayers who fail to file Form 8283 (Noncash Charitable Contributions), which is mandatory if you claimed deductions above $500.
IRS Audit Defense + Federal Income Tax Preparation Services
Now that you know about these dangerous audit traps, it will be easier to avoid falling into them during the 2020 tax season. However, the safest way to avoid tax errors and minimize penalties is to choose an experienced and reputable tax professional to provide you tax planning and tax compliance services and if that too little too late, with dedicated IRS audit representation.
Led by dually-licensed attorney-CPA and former public auditor David W. Klasing, our full-service tax firm provides everything you need to prepare for and survive an tax audit, including civil and criminal tax audit representation, IRS appeals representation, personal and business income tax preparation, bookkeeping and accounting services, tax compliance services, and cryptocurrency tax services. Contact us online right away to set up a reduced-rate consultation or call the Tax Law Office of David W. Klasing at (800) 681-1295 for 24-hour assistance.
In addition to our staffed main offices in Irvine, the Tax Law Offices of David W. Klasing has unstaffed (conference room only) satellite offices in Los Angeles, San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland, Carlsbad and Sacramento.
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Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company? Absolutely not! See our policies that address this issue here.
