Preparing tax returns is a complex affair for many taxpayers. The possibility of making a mistake and risking an IRS audit leaves many taxpayers extremely worried. Although full-blown tax audits don’t happen often, there are some factors that can readily trigger an IRS audit. In this blog post, we will discuss some common IRS tax investigation or audit triggers that you must strive to avoid. Read on.
Discriminant Information Function
Discriminant Information Function or DIF is an IRS computer system that is specifically designed to scan every tax return received by the IRS. It detects any anomalies in the returns such as duplicate information, as well as unusual deductions and credits. It compares returns with the returns of other taxpayers who fall in the same income bracket. If the DIF finds any anomaly in the tax return, it throws a flag prompting a review from an agent.
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Very High or Low Reported Income
IRS agents mainly focus on high-income earners. The majority of returns audited by the IRS are of taxpayers who earn $500,000 or more. Conversely, if you try to lower your taxable income by claiming suspiciously large deductions, there are high chances of your tax return being audited. If a tax return does not have an adjusted gross income, the IRS agents will put it under the microscope.
Difference in Reported Income and W-2
Employers are required to issue employees with a W-2 for their salary and wages. They also need to submit a copy to the IRS. In addition, there is a Form 1099 issued to employees at the end of each year for any income that comes from interest or dividends. All of this information is fed into DIF, and if there is any difference found between the reported income and the information provided by the employer, it can trigger an intense audit of the tax return.
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Huge Cash Transactions
A business that is engaged in large cash transactions of more than $10,000 is required to report to the IRS. You can expect the IRS to inquire about the source of funds if you spend or deposit a lot of cash, especially if the reported income does not support the transactions. You should be ready to present proof of sources of funds when you file a tax return.
Unusual Number of Itemized Deductions Claimed
The IRS expects taxpayers to live within their means. If you spend a significant amount of your income and claim tax deductions for that, it can trigger a full-blown IRS tax investigation, especially when you itemize your tax deduction. If anything you give away has a value of more than $500, it is recommended you have that item appraised, get a receipt and submit a Form 8283 at the time of filing your tax return.
The Bottom Line
Handling taxes is not easy. Even a slight mistake can trigger an audit of your tax return. If you feel your tax returns are subject to audit for any reason, it is recommended to consult an experienced tax attorney as they have better IRS tax problem resolutions. If you are looking for tax help in Fort Worth Texas and nearby areas, The Law Offices of Nick Nemeth can help. We have a team of experienced tax attorneys that have an extensive experience of handling situations such as tax audits and help clients get favorable outcomes. To get in touch with one of our tax attorneys, call (972) 426-2553 or fill out our contact form.
