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Cases That Will Lead to an IRS Audit
By Darrin Mish
Any taxpayer would like to know what entries in the tax return will be considered red flags by the IRS. For everyone's consumption, the IRS has computers that will process almost all tax returns and these will simply check for anything that is 'out of the ordinary' when compared to the statistical average. Anything beyond this average will be regarded as an audit flag. Depending on the severity of the situation, that particular tax return may be manually reviewed by an IRS employee or the computer will just directly print a notice that will be forwarded to the concerned taxpayer. Audit flags do not mean you are certainly up for an IRS audit. Your odds for an audit, however, are greatly magnified. Note though that there are flags that you can effortlessly avoid. One of these is submitting haphazardly filled out and incomplete forms. To avoid this, you may want to ensure that mathematical computations are done perfectly and information provided are true and correct. Otherwise, the computers cannot understand the entries in the tax return and an IRS employee will need to review this. However, filing tax returns electronically will somehow resolve this simple problem as the programs have math and field correctors that can identify erroneous computations and lacking entries. Another audit flag centers on your non-reporting of all your income. Basically, if you don't record all of your income, expect an audit. Miscellaneous income, dividends and interest are normally forgotten items but these must be reported to the IRS as well. Everyone who sends you a W-2 or 1099 is also forwarding a copy of it to the IRS and that is how the latter knows how much you've earned for a given year. The IRS also audits people who report that they are either making a great deal less or a great deal more than the industry norm. Statistically, this reason alone subjects almost 5% of all taxpayers to an audit. In addition, those who are making more than $100,000 yearly have 5 times more chances of being audited. You will also get audit flags if in a given year, your record contains extreme fluctuations in your income level. The IRS will be alerted if huge differences in income levels are declared as this would imply that you have under-reported your earnings at some point. It may sound obscure but a tax return containing too many zeros is more likely to catch the attention of the IRS. The agency believes that most transactions do not have exact amounts like $1000 or $500. If the IRS notices several instances of these figures, it will presume that you've been rounding up numbers. Because of this, an IRS employee will certainly review your tax return. These are just a few of the many known IRS audit flags but there are a great deal more that most people still do not know about. Knowing what to be careful about will certainly help you in avoiding an IRS problem. |
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