Published on: April 11, 2018 Last modified: January 14, 2021

Why Tax Audits Occur

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    While there have been less IRS tax audits since 2010, there are still a large number of things that can trigger an audit. In 2017, there was still over a million tax audits.

    An audit does not by itself mean you are guilty of wrongdoing. However, an audit does increase the likelihood that you could face severe tax penalties or even criminal charges.

    It is always a good idea to revisit why individuals get audited and how to avoid audits. Generally, the IRS can audit returns filed in the past three years. The penalties that result from an audit can be severe. It can be as much as 20 percent of the amount of an “erroneous claim.”

    If the IRS decides a return is frivolous and doesn’t contain enough information to assess whether it’s accurate, a taxpayer may face a penalty of $5,000. Also, just as a reminder, taxpayers can face criminal charges if the IRS feels you are guilty of tax evasion or fraud

    What leads to a tax audit?

    It is possible to reduce your chances of an audit by avoiding certain actions. The sorts of activities that will trigger an audit include:

    • Inaccurate reporting or the failure to report income
    • A high amount of charitable deductions, hobby losses
    • Reporting the wrong Social Security Number
    • Not following IRS guidelines concerning deductions for home office expenses
    • Unusually large mean or entertainment expenses
    • Taking deductions that are out of proportion to one’s income
    • Hobby losses
    • Taking early withdrawals from retirement accounts
    • Extensive business expense deductions

    However, the IRS will also more likely audit a certain type of individual. This can include those who earn more than $200,000. The IRS will also be on the lookout for significant changes in income, and will pay attention to salaries of principals in S Corporations if that salary is unusually low. And the IRS tends to audit businesses that mainly deal in cash transactions.

    When deducting alimony, the IRS will pay attention to whether reporting is consistent. This is relatively easy for IRS officials to detect since those making such deductions need to also report the Social Security number for those receiving the alimony payments.

    Some taxpayers will report expenses in round-dollar amounts rather than to the nearest dollar. For example, a taxpayer may try to suggest all of the expenses are either $50 or $100. The IRS will be suspicious of such reporting.

    Facing an tax audit

    Again, there are no guarantees that you will avoid an audit, even if you are reporting income and expenses accurately. When it comes to questions concerning an audit, it is best to address such items to attorneys who have experience dealing with the IRS concerning audit matters.

    There are strategies attorneys can use to protect Michigan taxpayers from assessment of penalties during the audit process.

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