9 Tax Return Items That Will Cause An IRS Audit

MONEY Magzine has a very good article if you want to avoid an IRS audit which is expensive, times consuming and very stressful.  If you get an audit notice make certain to get a tax professional to represent you.  Why?  Because if the IRS agents asks you a question when you represent yourself you may more may not answer it to your benefit.  If you have a representative, the Agent must ask your representative and the your CPA or attorney can always stall and tell the agent they must ask their client. That gives everyone time to craft the best answer and make sure the wrong answer is not given to the agent.   READ MORE HERE

10 Things that Cause Tax Audits of US Expatriates

1. Not Reporting All Of Your Taxable Income: The IRS cross checks your income sources with 1099s and W-2s. If your income has dropped, that may be a red flag. Do not under report your income, no matter how tempting. If you have some self-employed income, report it and then use every deduction or write off you can find.  They have tax treaties with many countries and may find out what you actually made abroad even though you thought they could not find out.

2. Filling Out Forms 2555 Incorrectly:  Leave boxes or lines blank, or fill out this form wrong you may cause an audit, an IRS letter of Inquiry, or perhaps a letter disallowing your foreign earned income exclusion.  Be careful if you use a program and do your return yourself. Best to have a professional review it before you file.  The IRS has found that many people are claiming this exemption are not eligible. Therefore, the number of audits has increased substantially.

3. Form 1116 (foreign tax credit) not done correctly: This is a difficult form to prepare and if done incorrectly, the IRS may disallow any foreign tax credit at all.

4. Taking Higher Than The Average Deductions: If the deductions on your return are disproportionately large compared to your income, the IRS audit formulas will go “tilt”. So if you have large medical deductions be sure you can prove them if need be.

5. IRS Finders Fee Program: The IRS does pay rewards to those who turn in US taxpayers for not reporting substantial amounts of income on their returns. If you have a co-worker, etc. who no longer likes you and knows your secrets, you may be in danger if those individuals learn about the big rewards that the IRS pays for turning you in.

6. Business Meals, Travel And Entertainment: Schedule C is filled with tax deductions for the self-employed individual. And the IRS has figured out that often some self-employed individuals tend to claim excessive deductions. They then make the assumption that all such individuals may cheat so Schedule C will get a review.

7. Claiming 100% Use Of Your Car For Business: If you are self-employed and use your car for business be honest with how much you actually use the car for business. Keep very good records of the miles you drive. I know it’s a nuisance, but necessary.

8 . Large Cash Transactions: The IRS requires reports  in the US to be filed for cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses.  If they receive these reports from these places they may audit you.  The IRS also tracks wire transfers in and out of the Country.   Such transfers may result in an audit if your tax return fails to show the receipt of such money as income or the amount does not fit in with your financial resources.  If you receive a large gift from abroad, you my have to file form 3520 to report that gift (no tax is due if you file this form for gifts from nonresidents outside of the USA) or risk a huge penalty for not reporting the gift.

 9. Math Errors: If you do your tax return in long hand, check your math and be sure to sign the return and put in the correct social security numbers. A sloppy return can trigger an audit.

10. Failure to Properly Abandon your State Tax Domicile:  Many states like Virginia, New Mexico, California and other have state tax laws that make it difficult to move abroad and stop paying state taxes if one of these is your prior state of residency. This is aggravated if you keep using an address in that State or return to that state after spending 2 to 4 years abroad.  These states get your Tax information from the Federal return you file and because you are still using an address in that State on your return, send you an assessment or audit you for taxes they feel are due. Take precautions to properly surrender your tax domicile (which is often different than residency) to avoid this problem.

We are experts at help you avoid these problems. Visit our website at www.TaxMeLess.com or email us at ddnelson@gmail.com. 

WHAT ARE YOUR CHANCES OF BEING AUDITED BY THE IRS?

IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2011 activities. The data book provides valuable information about how many tax returns IRS examines (audits) and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections. The figures and percentages in this article compare returns filed in calendar year 2010 and audited in FY 2011 to returns filed in calendar year 2009 and audited in FY 2010. 

What are the chances of being audited? Of the 140,837,499 total individual income tax returns with a filing requirement, 1,564,690 were audited. This works out to roughly 1.1%, the same as the rate for the previous year. 

Only 25% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That's higher than the 21.7% figure for the previous year. The 75% balance of the audits were correspondence audits, down from 77.1% for the previous year.

Following are selected audit rates for individuals.

• For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 4.3% of returns were audited in FY 2011, down from 4.7% in FY 2010.
• For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.8% of returns were audited in FY 2011, an increase from 3.3% in FY 2010.0.
• For returns showing total positive income of $200,000 to $1 million, 3.2% of returns not showing business activity were audited, and 3.6% of returns showing business activity were audited. The audit rate for such returns was higher than the 2.5% and 2.9% respective rates for the previous year.
• For FY 2011, the audit rate for returns with total positive income of $1 million or more was 12.5%, close to forty nine percent higher than the 8.4% rate for FY 2010.

Not surprisingly, examination coverage increased for higher income earners. For example, the percentage was 1% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (up from .71% for FY 2010), and 2.66% for those with $200,000 to $500,000 of AGI (up from 1.92% for FY 2009). Exam coverage jumped to 11.8% for those with at least $1 million but less than $5 million of AGI (up from 6.67% for FY 2010). Similarly, coverage increased for those with at least $5 million but less than $10 million of AGI, as well as for those with AGI of $10 million or more.

Select audit rates for business returns were as follows:

• For all corporate returns other than Form 1120S, 1.5%, versus 1.4% for the year before.
• For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.6%; $1–$5 million, 1.9%; and $5–10 million, 2.6%. For FY 2010, the percentages were, respectively, 1.4%, 1.7%; and 3%.
• For partnership and S corporation returns, the audit rate was .4%, the same as for the year before.  This would seem to make filing Sub S returns and LLC's which file partnership returns a good strategy to avoid audits.

Math errors on individual returns. Of the roughly 6.6 million math error notices that IRS sent out relating to the 2010 return, 49.5% were attributable to the making work pay credit (MWPC), which was a refundable tax credit based on earned income and was available to taxpayers in 2009 and 2010.

Of the total math error notices, 14.1% were for tax calculation/other taxes (which includes errors related to self-employment tax, alternative minimum tax, and household employment tax), 7.2% related to exemption number/amount, 6.1% related to the EITC, 6.2% related to the standard/itemized deduction(s), and 2.2% related to the child tax credit.

Penalties. In FY 2011, IRS assessed 28.75 million civil penalties against individual taxpayers, up from 27.1 million civil penalties assessed in the previous year. Of the FY 2011 assessments, the “top three” penalties in percentage terms were 58.6% for failure to pay, 25.6% for underpayment of estimated tax, and 13% for delinquency. On the business side, there were a total of 1,080,027 civil penalty assessments (down from 1,145,931 for the year before), and the “top three” penalties in percentage terms were 55% for delinquency, 24% for failure to pay, and 18.4% for estimated tax.

Offers-in-compromise. In FY 2011, 59,000 offers-in-compromise were received by IRS (versus 57,000 for FY 2010), and 20,000 were accepted (14,000 for the year before).

Criminal cases. IRS initiated 4,720 criminal investigations in FY 2011. There were 3,410 referrals for prosecution and 2,350 convictions. Of those sentenced, 81.7% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2010, IRS initiated 4,706 criminal investigations, there were 3,034 referrals for prosecution, and there were 2,184 convictions. Of those sentenced, 81.5% were incarcerated.

The IRS Data Book can be viewed at http://www.irs.gov/pub/irs-soi/11databk.pdf.  IR-2012-36 can be viewed athttp://www.irs.gov/newsroom/article/0,,id=255853,00.html.

Expats Guide to Surviving and IRS Audit

The Chairman of Thomson Reuters China has written a guide to help expats survive IRS audits. In the past several years the IRS has hired thousands of new personnel in its International Division and the number of expatriate tax audits are increasing dramatically and will continue to increase in the future. READ THE ARTICLE HERE.

The IRS has discovered that tens of thousands of expats are taking the incorrect foreign earned income exclusion and foreign tax credits which has directly resulted in the increase in Tax Audits. Taxpayers who do their own returns on consumer tax return software often make errors on their returns due to lack of guidance. Remember all such errors may result in additional taxes due, interest and penalties which can often be very high.

  Our firm has represented hundreds of taxpayers in IRS audits with great success. Please email us if you need help. Thanks.   ddnelson@gmail.com