Could you get audited in 2014 ?

The IRS is on the prowl this year and they could be coming after you. The Internal Revenue Service is able to more easily identify possible red flags that will trigger audits thanks to computerized checks and an improved detection system.

Audits are normally triggered when a tax return is filed containing something unusual such as a deduction that is above average. The taxpayer has nothing to worry about as long as they are able to properly defend the filings with documentation and logic. Unfortunately, if this happens, you will still have to deal with the added stress and the response time.

Below are 9 signs that you might get audited this year.

You Forgot To File One Of The Tax FormsAll tax forms sent out to taxpayers are also sent to the IRS. If you forget to file one of the forms you received with your taxes, the IRS might flag your tax return to be reviewed.

You Are Self-employedAlthough it does not seem fair, when a taxpayer is self-employed it can raise red flags. The best advice, if you are self-employed, is to keep track of all of your expenses and all documentation so you are able to defend all credits and deductions that you claim.

You Made A Lot More Money In 2013Major changes in this year’s income is a red flag for the IRS. It can mean that the taxpayer has under reported earnings in the prior year.

You Claimed Losses From One Of Your HobbiesIt is not legal to write hobbies off as business expenses. For example, if you make jewelry as a hobby, you cannot deduct material costs and tools. Now if you were selling the jewelry you made, it would be considered a business and you would be able to deduct those costs. Remember, a business is an endeavor you enter into and conduct with a reasonable expectation of making money.

You Were Exceedingly Charitable This YearThe IRS looks for taxpayers that have inflated donations to charitable organizations. They pay particular attention to people who have donated close to $500 because that is the limit that can be deducted without filing Form 8283.

You Have A Bank Account OverseasThis year, the IRS has additional requirements for taxpayers with banks accounts overseas. If you fail to report one of the requirements, it could be an audit trigger.

The Numbers On Your Forms Do Not Match – If you make a mistake with the numbers on your forms or the amounts do not add up, chances are the IRS will notice and will review your return carefully for any other discrepancies. Make sure you review your return carefully before filing.

Your Deductions Include Expensive Entertainment And Meal CostsThe IRS usually checks high business deductions to ensure the business expense is legitimate.

You Deducted High Home Office Expenses (Not The New Home Office Standard Deduction)When you itemize your home office expenses, the IRS will often review the tax return to make sure the expenses are really for business purposes. There is a new standard deduction for home office expenses that will not raise any red flags.

You should not worry as long as you know that you filled out your tax return properly. Just make sure that you keep good records of all the deductions and credits you take so you will be prepared if the IRS has any questions.

Why you won’t be audited?

Last year, the US saw a huge fall in the tax audit rates by 5.3%. This reduces the probability of individuals being audited.  This research was conducted by the Transactional Records Access Clearing system.  This trend is due to the cuts in the federal spending.  This process is called sequestration and this is a process which cuts down the employees who are eligible for tax audits so that the fraudulent individuals can be tracked down easily. Kevin Brown, leader of Pricewaterhouse Coopers ‘tax controversy and dispute resolution practice, rightly said that if the number of individuals decrease then it correspondingly decreases the number of audits.

The National Treasury Employees Union conducted a survey and it was found out that these cutbacks could impact enforcement actions. The audits usually conduct its audits on days when the works have five to seven unpaid furlough days in the summer. The cuts are also timed in that part of the season, where there is a recruitment freeze which prevents the agency to fill up jobs.  In 2011, the IRS had 7000 full time employees lesser than what it had during the year 2010. The staffing and other enforcement actions were lesser by 6% last year.

The lesser number of individuals to be covered for auditing does not mean that the defaulters can make merry. On the contrary, it is tougher to escape this way because being one among 10,000 people definitely has more visibility than being one among 100,000 people.  The way the audits are being conducted has also changed. Earlier, face to face audits were the fashion. However, this has now been reduced and audits through email correspondence are the order of the day recently.  Audits through emails have increased to almost triple the amount of quantity around 20 years ago.

The IRS has effective software systems to track if the income is not reported rightly. Most of the cases of under reporting of income is tracked through this software by matching the income filed in the form 1099 and other related paperwork, while tax filing. Fewer audits are not necessarily a reason for the defaulters to enjoy. The fewer audits take a longer time to get completed than the frequent speedier audits that was the process some time back.

If a defaulter is found to have misreported income or done fraudulent tax filing in the new long audit process, then the interest and the penalty charges that he needs to pay is exorbitant than what the frequent audits charged. This puts the cheaters in a great fix, as in the current scenario, they not only have to pay taxes due for years together but also have pay very high penalty charges of each year’s missed payments.

Though the audits on individuals have been reduced drastically in the year 2012, the frequency of the audits on the corporate organizations has not changed according to the recent IRS survey. More than 17% of the organizations were qualified for audit in 2012.

Avoiding the Dirty Dozen Audit Red Flags

The taxpayers are warned on manipulating any information related to the filing of their tax return deductions. This can let loose the ever inquisitive nature of the IRS and you can invite trouble upon yourself, which is best avoided at any cost. There are many factors that may flag your return for an audit and you should always consult with your tax professional to ensure that your return is in compliance with all applicable laws. In this article, I am going to point out twelve indicators / warning signals which in case exceed from what is believed to be normal, can trigger an inquiry from the IRS. The twelve ‘Red Flags” as they are addressed, are listed below.

  1. Filing higher income.
  2. Failing to report all taxable income as stated by the duplicate records available to the IRS.
  3. Filing for large charitable deduction, disproportionate to your known income.
  4. Filing for home office deduction.
  5. Filing for deduction on real estate rental losses.
  6. Filing for deduction on travel, business meals & entertainment.
  7. Filing the deduction for full (100 %) use of a vehicle.
  8. Filing the deduction on the losses related to a hobby activity.
  9. Filing a deduction for running a business on cash.
  10. Failing to report the account you hold in a foreign bank.
  11. You engage in transactions involving currency.
  12. Filing for deductions which exceed the average.

Availing of deductions sufficing the dictates of being reasonable can actually help you avoid unnecessary hassles, which would emanate out of a situation like facing the IRS audit. A part of the mentioned “hot spots” are clear manifestations of a planned deceit; the rest can be majorly attributed to ignorance on the taxpayer’s part on filing deductions. An experienced tax expert can help you remain on desired procedures along with putting up an effective representation for you in case required.

Handling the IRS audit on your own is not advisable: you wouldn’t have the expertise and skill required in handling the excruciatingly long & intimidating interrogation by the examiner. Rather the nervousness ensuing from the process holds the potential of you spilling off the restricted information to the auditor. This would worsen the matter further for you.

The bill raised by the examiner would be proportional to the information you give, as he digs for more.

Taxpayer has the legal right to representation. You can contact a seasoned tax expert to represent you at the IRS audits and aid you in resolving your tax issues forever. 

900,000 Did Not file a 2010 State Income Tax Return

The Franchise Tax Board (FTB) recently announced that it is contacting more than 900,000 people who did not file a 2010 state income tax return.  

FTB collects information about tax payers by using more than 400 million income records.  Tax Board gets information about non filers from third parties such as the banks, employers, IRS, state departments, and other sources.

Moreover, FTB compiles the information from occupational licenses and mortgage interest payment.  Using such information allows FTB to contact those who earned the income in State of California but did not file the tax return.

According to recent post on FTB website, last year, FTB collected more than $574 million through these efforts.

Once FTB contacts a tax payer, Individuals have 30 days to file their State Tax Return or show why they are not required to file.  If required return is not filled, FTB makes a tax assessment based upon the information it has collected.  In addition to tax assessment, taxpayer is also billed an interest, fees and penalties of up to 50% of tax due. 

What to do if you receive such notice and/or have not filed the tax return?

You can respond to the letter by visiting FTB Website here.  You simply enter the Notice Number and respond to the request.  You should be very carefull in response as anything you write or tell to FTB becomes an evidence and stays on their records. 

Therefore, It is highly recommended that you consult with your CPA or Tax Attorney to address the issue immediately.   Not responding to the letter will simply escalate the issue and increase the penalties.  Tax professional experienced in dealing with IRS and FTB can quickly indentify the problem and take corrective actions.

Our office can also help you with all kinds of audits include filing previous year tax returns.   We can sit down with you to learn about the problem and come with a game plan to reduce the tax liability.