5 Common Tax Audit Triggers

Running a small business is hard, but tax problems are even harder. Rely on Collins Legal PPC for the tax help you deserve.

No company wants to have a tax problem. Both the IRS and state governments can be aggressive in collecting taxes owed, and for good reason. If taxes are legitimately owed, a taxpayer’s failure to pay deprives state and federal governments of much-needed funds for essential government services like roads, schools, and law enforcement.

In most cases, it is easier to avoid a tax problem than to fix one. Here are five of the most common reasons the IRS or state tax agency may flag a taxpayer for audit:

Failing to File a Tax Return

While no one should pay more than their fair share of taxes, state and federal governments expect everyone to pay the taxes owed. Because the IRS receives copies of every 1099 and W-2 form that is — or isn’t — filed, the IRS knows when taxpayers receive income that should be reported on a tax return. When a taxpayer fails to file a tax return, a penalty of 5% can be assessed on the total tax bill. This penalty can increase every month that the tax return is late. The total penalty could represent up to 25% of the total taxes owed and could be collected like any other civil fraud penalty. Luckily, a tax advisor can suggest ways to resolve issues arising from late tax returns.

Misstating Income

As with failing to file a tax return, state and federal tax agencies have ways of cross-checking to determine the amount of income a taxpayer should report. Misstating income, either deliberately or by mistake, can trigger an inquiry or audit from the IRS or state tax agency. Often, income is overlooked innocently because the taxpayer either forgot about receiving it or failed to recognize that it could be taxable income. For example, many taxpayers forget about gambling winnings, inheritances, and fringe benefits from a job that should be accounted for. A tax professional can discuss some of the more common sources of income that taxpayers forget to include when preparing a tax return.

Misclaiming Deductions

While no one, least of all the IRS or state taxing agencies, can tell a taxpayer how to spend his or her money, they do know the typical ranges for deductible expenses for a taxpayer’s income level. For example, they know that most taxpayers will not give away the majority of their income to charity or pay the majority of their income to a bank as mortgage interest. When glaring examples like that appear in a taxpayer’s tax return, the agency will want some documentation showing that the taxpayer did not understate his or her income or overstate his or her deductible expenses. A tax consultant can double check that the deductions are within the expected ranges and suggest the records that the taxpayer will need to support the numbers included in a tax return.

Filing on Paper

The reason electronic filings are less likely to invite scrutiny is because electronic tax returns allow filers to double check their arithmetic. That is, one of the most common flags for tax agencies is simple mathematical errors. However, once a tax agency begins scrutinizing a tax return, it may find other problems larger than an arithmetic mistake. Avoiding scrutiny in the first place by relying on tax professionals.

Ignoring a Notice from the IRS

If there are issues in a tax return, the IRS and state tax agencies have to notify the taxpayer. In some cases, the error is minor and merely requires the taxpayer to verify some information or accept an adjustment to some information. In some cases, you may have to pay additional taxes owed. In other cases, a full audit may be initiated. Whatever you do, you shouldn’t ignore the notice. Rather, consulting with an IRS tax attorney to determine how to respond is often the most prudent course of action. IRS tax lawyers are experienced in dealing with notices and can often provide a number of options for dealing with a potential tax problem.

Are you experiencing a tax problem? Rely on the help of Collins Legal when you get into a bind.