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6 Income Tax Audit Triggers

by Jim Freeman, CFP® on 4/22/2016

Laura Saunders recently wrote an interesting article in the Wall Street Journal entitled, “Is Your Tax Return Audit Bait?” With taxes still on everybody’s mind, I decided to give you a brief summary of her article.

First of all it’s interesting to know that in 2015 the IRS audited less than 1% of nearly 147 million individual returns – the lowest rate in a decade. The overall numbers don’t tell the whole story. In recent years, the IRS has increased its focus on high earners, and in 2015 it audited nearly 10% of returns with $1 million or more of income. In 2006, just 5.3% of taxpayers reporting at least $1 million of income were audited.

6 Areas Known for Attracting IRS Attention:

1. Form 1099 Mismatches

Income reports received from banks and brokers are easy to detect if they are incorrectly entered or completely left off of tax returns.

2. Charitable Deductions

Taxpayers must have appropriate proof of a donation in hand by the time they file their return to qualify for a deduction. The law has gotten stricter in recent years and the IRS is enforcing it.

3. Small-Business Income

IRS research has shown that underreporting of income is high in cash businesses. To uncover it, the IRS may turn to analysis of bank deposits and other methods.

4. Business, Travel, Meals and Entertainment

This is another area of scrutiny. Taxpayers must have records detailing who, what, when, where and why to quality for a deduction.

5. Undeclared Foreign Accounts

U.S. law requires taxpayers to report foreign financial accounts. The authorities know much more about such accounts than in the past due to a provision requiring foreign financial firms to submit information to the IRS.

6. Manually Prepared Returns

It can be difficult to fill out forms correctly by hand. When the IRS enters data from such returns, it automatically checks for math errors and other mistakes that can generate not only a letter but also further scrutiny.

posted in BlogPersonal Finance

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Posts are general in nature and do not constitute the rendering of legal, investment, accounting or other professional advice.