Tax Audit Red Flags

Many people know that an audit is not typically a good experience, but what triggers an audit from the IRS. There are several red flags that the IRS look for when determining what tax returns will be audited.

The first red flag is foreign assets. Since 2009 the IRS has been increasing efforts to regulate offshore accounts. On Schedule B, a taxpayer is asked about ownership in foreign accounts. If they check the box but do not provide any information on the assets it will automatically trigger an audit.

The next red flag can be ex-spouses. Many time following messy divorces and ex can want to cause problems for the other spouse. They contact the IRS with information about the other spouse which may include money laundering, serious financial crimes, underreporting income, etc. Some of the claims are real and others are not, but they have to be investigated.

Too many zeros on a tax return will also be a red flag. It is ok to round to the nearest dollar, but not to the nearest hundred or thousand. It is unlikely that all the sums come out perfect, so too much rounding will cause problems.

Many times a home office credit will send up the red flag. The IRS is cracking down on home office deductions. The credit can only be claimed if your home office is the primary place of business and  used just for work.

Other red flags are miscellaneous income over $600 that was not reported; fishy tax deductions; earning over $5 million; say the wrong thing to the wrong person, even if it is a  joke, you never know who will turn you in; too much work-related driving; exaggerated donations; owning a business that is losing money; and unreliable tax preparers.


How to Prepare for an Audit

This is the time of year that the IRS conducts tax audits. While it can be scary, there are ways to prepare before the audit. If you are meeting the auditor in person there are a few things you should prepare ahead of time.

Before the Audit

Whether you are meeting an auditor by yourself or with a professional, it is important to be prepared. Find all records that relate to and back up your tax return. The IRS has the right to look any records used to prepare your tax return, so to make it easy. Organize the records use to prepare your tax return. This will also help refresh your memory before the audit meeting.

Remember that neatness counts. The more receipts the auditor goes through, the more chances they will find something else. Auditors tend to reward good recordkeeping and give the benefit of doubt if any problem arises. Pinpoint potential problems and be able to show why your right to take a deduction. Do some research, if necessary.

What to Bring to the Audit

A successful audit is backing up your tax return with documentation. Proof should be in writing, even though auditors are allowed to accept oral explanations. You should bring bank statements, canceled checks, and receipts. Also electronic records, ledgers, journals, and printout of any computer data will also make it easier to show proof. Do not make the IRS guess because they will assume guilt. Anything that will help give proof should be available for the auditor to review.

It is important to stay calm and be prepared to answer any questions the auditor would ask. The success of the audit depends on proving the return is correct.


How to Take the Fear Out of Being Audited for Your Taxes

The thought of being audited for taxes scares many taxpayers. However, the fact of auditing is something that can’t be avoided. The IRS conducts audits of at least 1 percent of tax returns every year. Nevertheless, you can do some things to make sure the auditing process goes smoothly and is less frightening.

  1. Prepare ahead of time by keeping good records of anything you include on your taxes. This means all expenses and deductions as well as your W2 forms and other records of income.
  2. Provide explanation of expenses. If you include the cost of a meal or travel expenses as an expense on your taxes, be sure to explain why it was added. A common area that invites auditing of your tax return is suspicious business expenses.
  3. Always double check before you include an expense if you are not sure that it is deductible. Talk with a tax professional to ensure that you can use it on your tax return.
  4. Use exact numbers for your expenses instead of estimating. These numbers should be based on your receipts.
  5. Don’t be sloppy with your tax return. If you prepare it by hand, make sure all numbers and information is readable.
  6. Check and re-check your return before you submit it. Make sure there are no mathematical mistakes or any errors before you file.

What If You Are Audited

If you get the notice that says you are being audited, you should submit all paperwork that is being asked for. It is also advisable that you work with a tax attorney if you are concerned about the auditing procedures.

According to the IRS website,, they may conduct either an in-person audit or an audit by mail. If it is an audit by mail, you simply have to provide the information asked for. An in-person audit means that you will have to meet with the agent in person and provide the requested records.

The auditing process can be quite scary for either individuals or businesses. However, you can avoid being audited by providing accurate and detailed information on your tax returns. In the event that you are audited, working with a professional can ease your fears. Most audits end quickly and painlessly once you provide the necessary information. Plan ahead by keeping good records and responding quickly and you can get through the process.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.