There are many new IRS audit triggers based upon recently released data. What are some of the factors the IRS uses to select candidates for audit and how does this work? Most IRS audit selections are based upon sophisticated computer modeling that analyzes taxpayer behavior and deduction areas that are outside of statistical norms. Recently, one of the fastest ways to ensure an audit was simply to file a paper return instead of an electronic return. The paper return signals the IRS that mathematical errors are highly likely. Another recent surprise is based upon the findings of the Treasury Inspector General for Tax Administration, who found the IRS made $15.6 billion in erroneous Earned Income Tax Credit or EITC payments in 2015. The IRS believes 21% to 26% of EITC claims are fraudulent, and EITC has been a recent audit target.
The new report includes perennial IRS audit favorites such as a home office and income in excess of $200,000 as heavy audit targets. 2014 statistics showed you were three times more likely to be audited if your income was between $200,000 to $400,000 than for those with incomes of $100,000 to $199,000. FBAR reporting and offshore income, asset and account disclosure continues to be the “highest priority” for the IRS and the recent information sharing by international banking and investment houses directly to the IRS makes this task much simpler.
The IRS has focused upon business deductions and business related losses. Schedule C losses provide much needed tax relief for many US taxpayers, however they also raise the eyebrows of IRS auditors. New business ventures are expected to experience losses, but extensive or repetitive losses from existing businesses have experienced a sharp increase in the number of IRS audits. The new IRS audit triggers include deductions for business expenses which are often poorly documented (if any written documentation genuinely exists). Upgraded systems allow IRS software to compare the purpose of business expenses with the nature of the business itself. For example, a landscaping business would naturally expense tools such as a rake or shovel, as well as equipment such as a riding lawnmower or leaf blower. If you are a software company, these deductions would not be seemingly appropriate and IRS systems will flag them for review.
The new IRS audit triggers are usually based upon behaviors resulting from statistical anomalies or analysis by watchdogs such as the Treasury Inspector General. They also focus upon areas that provide substantial tax relief such as deductions, losses and expenses. The experienced IRS audit and tax attorneys at Allen Barron have decades of experience helping US taxpayers to achieve a better outcome when facing an IRS audit. The new IRS audit triggers combined with more advance systems and increasing pressure to generate tax collections are driving IRS audit practices. If you have been contacted by the IRS for an audit we invite you to call for a free consultation at 866-631-3470.