There is no shortage of ways a taxpayer can run afoul of federal tax reporting requirements and find themselves in an audit. After all, the Internal Revenue Code (Federal Tax Law) comprised almost 74,000 pages as of 2013 and is growing each year. Despite the overwhelming quantity of information in the Code, you, the taxpayer, are required to sign your tax return to assert, under penalties of perjury, that it is true, correct, and complete to the best of your knowledge and belief. How does a normal taxpayer stay in compliance with the filing requirements of such a onerous set of tax laws and regulations and minimize their risk of audit? If you have a complex tax situation you will need the guidance of a knowledgeable licensed tax professional.
There are numerous common IRS audit triggers and below are 10 very common ones to be aware of:
1) Failure to report all income;
2) Net operating losses from pass through entities including S-Corporations or partnerships;
3) Rental losses that should be passive losses limited to extent of passive income;
4) Abnormally large cash & non-cash charitable contributions;
5) Big deductions for meals & entertainment and travel expenses;
6) Losses deducted that should be limited under hobby loss rules;
7) Gambling losses (taxpayers are only allowed gambling losses to extent of gambling winnings);
8) Home office deductions;
9) Alimony deductions that are not made under a divorce decree or separate maintenance order; and
10) Failure of an S-Corporation to pay adequate payroll compensation to active shareholder for services.
We recommend that you, as a taxpayer, keep very detailed receipts for all deductions, provide your licensed tax professional with all pertinent tax information, and ask questions. If you have a question about your tax return, then ask your licensed tax professional to provide an explanation.
You are ultimately responsible for your tax return. That is why choosing the right professional preparer is so important. Make sure you are comfortable with your tax professional’s level of knowledge, quality of work, and character. An audit is no fun, but preparation and quality work helps make them tolerable.