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Taxes Information |
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Tax Audits: What Signs Make You More Likely to be Audited by the IRS?
It's a major fear for most Americans: A notice from the Internal Revenue Service (IRS) summoning you for an audit. What is it about these three letters that strikes a cord of fear in Americans' hearts? Learning the signs that could put your tax return at the top of the list for an audit, and avoiding them if possible, may put your mind at ease. Statistically speaking, your chances of actually being audited aren't that high-according to IRS data, one in 150 individual taxpayers were audited in 2003. This number had gone down in recent years-about one of every 79 tax returns was audited in 1998-but then, in 2004, individual taxpayer audits exceeded 1 million for the first time since 1999. Also in 2004, the IRS gathered a record $43.1 billion in enforcement revenue, a 15 percent increase from 2003. Now in 2005, the IRS plans to add more enforcement to their team, meaning that more tax audits could potentially be performed. What adds to most people's fear of being audited is that of the unknown: Very few people know just how the IRS chooses which tax returns to audit. "That's a very closely guarded secret that not many people in the IRS know," said Bernard S. Kent, a partner with the human resource services group at PriceWaterhouseCoopers. Still, there are some signs that will put your tax return at the top of the "to audit" pile. So take notice of -- and by all means avoid if they're not legitimate -- these red flags that increase your chances of catching the tax examiner's eye. A computer program called the Discriminant Index Function, or DIF, is the first way your tax return could be marked for an audit. It looks most closely at the following items: * Higher incomes: If your income is more than $100,000, your chances of being audited increase to one in 20. Says Eric Tyson, co-author of "Taxes 2005 for Dummies," "Higher income earners are more likely to be audited because there is more tax money at stake." * High incomes compared to the previous year * Unreported income (investment returns, etc.) * Income other than basic wages (contract payments, etc.) * Home-based business: Particular attention is given to returns that claim home businesses in addition to a salary income or excessively high deductions that don't match with the business (for instance, expensive business meals for a virtual administrative assistant.) You should also be careful with how you define your home office. "The room has to be used exclusively for business purposes," said Kent. "You cannot just have a desk in your living room where you have a television set." * Large business meal and entertainment deductions or excessive business auto use * Low income with large business deductions: Did you report earning $40,000 and write off a $50,000 car for business? Chances are a tax examiner will find your return warrants a closer look. * Non-Cash Charitable Deductions * Hobby Losses: Filing a Schedule C to report income or loss from a sole proprietorship that is not really a business but a hobby is one of the highest risk moves you can make. * Offshore credit cards * Large casualty losses: The rules for claiming a casualty loss are very specific, so be sure your loss qualifies before claiming it. * Having several dependents. Tax returns that claim the earned income tax credit-a break for those with low-incomes-are also scrutinized more closely by the IRS. That's because its requirements are complex and many honest mistakes are made by those who think they qualify, along with those who intentionally try to increase the credit's payout. If You Have Legit Deductions, Take Them This isn't to say that you should be afraid to make honest deductions on your tax return or shy away from credits for which you qualify in order to avoid the IRS. According to Robert G. Nath, author of "The Unofficial Guide to Dealing with the IRS," As long as your deductions and expenses are legitimate and you have documentation, they will be allowed." In fact, most Americans overpay on their taxes, which is why we highly recommend reading Lower Your Taxes - Big Time: Wealth-Building, Tax-Reduction Secrets from an IRS Insider as soon as possible in 2005 (or you will likely end up paying the government hundreds or even thousands of dollars in taxes that should have been yours to keep.) Written by a former IRS tax attorney and senior tax law specialist, Sandy Botkin, CPA, Esq., Lower Your Taxes - Big Time is one of the smartest under-twenty-dollar investments anyone could possibly make. And in the event that you get the dreaded IRS letter in the mail that your tax return is being audited-don't despair. "Just because you get a correspondence audit letter, there's no need to panic," says Nath. "In fact, if you get a letter instead of a call, that indicates the IRS views the inquiry as not particularly earth shattering." For more money-saving tips in 2005, don't miss these past SixWise.com articles: * Top 10 Ways NOT to Throw Your Money Away in 2005 * Stop Overpaying the Government Thousands of Dollars for Good From the FREE SixWise.com e-newsletter, the Web's #1 most read newsletter with original articles in all 6 areas of life leading to complete wellness.
MORE RESOURCES: Californians in these counties may still have to pay taxes KTLA Los Angeles 3 Retailers Face Theft, Fraud and Tax Evasion Charges CSPDailyNews.com Middle Class Tax Refund: 5,000 more inflation relief payments going out, California agency says KCRA Sacramento Opinion: Governments keep squeezing businesses for more tax money, shooting themselves in foot The Globe and Mail Georgia Supreme Court declares revenue from COAM leases ... The Current GA 2024 state ballot battle to determine if voters can pass school parcel taxes by majority vote EdSource Alaska marijuana industry says baked-in taxes are too high Alaska Public Media News Will You Owe Taxes When You Sell Your Home? Morningstar Watch Out New York – New Jersey Wants Its Taxes Too! Littler Mendelson PC Opinion | Explaining Alabama's state grocery tax reduction Alabama Political Reporter 2023 Senior Tax Freeze application deadline fast approaching ... Philadelphia Water Department Gainesville property taxes to leap 29% over rollback rate Mainstreet Daily News Gainesville Johnson County antique mall forced to close as owner owes $62K in taxes, state says Kansas City Star DesChamps & Kalb: Smart leadership and low taxes go hand in hand. Greenwich Free Press Tax Tiff: Counties take aim at state over school equalization taxes Lewistown News-Argus Civic calendar | PG&E seeks $2M refund for property taxes from Humboldt County Eureka Times-Standard FTC Warns Tax Preparation Companies About Misuse of Consumer ... Federal Trade Commission News Countries Can Tap Tax Potential to Finance Development Goals International Monetary Fund Tax Collector Announces Second Quarter Installment Due October 1 ... Westport, CT (.gov) Man sentenced for $3.5 million, multi-year fuel credit tax fraud Department of Justice CBJ property tax payments due September 30 – City and Borough of ... City and Borough of Juneau Two Tax Shelter Promoters Found Guilty in Billion-Dollar Syndicated ... Department of Justice Median Household Income After Taxes Fell 8.8% in 2022 U.S. Census Bureau Douglas County OKs property tax relief; state review required The Denver Post Hooper energy tax, expected to generate $510K a year, spurs ... Standard-Examiner Iceland Prime Minister Promises to Increase Tourism Taxes Travel Market Report Tax laws can help victims of federally declared disasters Kiplinger's Personal Finance Former CFO of Russian Natural Gas Company Sentenced to More ... Department of Justice Hearing Wrap Up: Bidenomics Levied an Inflation Tax on All ... House Committee on Oversight and Reform | County Council passes resolution supporting senior real estate tax ... Leader Publications This Little Known Tax Credit Helps Low-Income Workers Catch Up on Retirement Contributions Yahoo Finance Tennessee revenue falls amid tax holidays, business break Chattanooga Times Free Press QCDs: A Tax Break Worth the Hassles - WSJ The Wall Street Journal Downtown Cheyenne property owners to vote on their taxes Wyoming Tribune Adopted Tax Rate at Lowest Level in 33 Years Richardson ISD ORANGEBURG CITY: Budget ups taxes and provides raises The Times and Democrat City of Owensboro warns Airbnb owners to pay outstanding taxes 14 News WFIE Evansville 70 under 70 plan can help. Ohio must freeze property taxes for seniors The Columbus Dispatch Collier cuts property taxes for next year, takes conservation money Naples Daily News Taxes, guns, schools, birth and death: State budget touches on all aspects of North Carolina life WRAL News Manufacturers defend Georgia tax incentives - The Current The Current GA California Companies Defer Billions in Taxes, Interest-Free, as ... The Wall Street Journal Mehlville schools boost revenue under tax loophole St. Louis Post-Dispatch Making 'cents' of property tax infatuation under the Kansas ... Kansas Reflector Mahoning auditor follows up on tax reappraisal data Youngstown Vindicator Property taxes for 2024 reflect a record year of inflation in Florida WUSF Public Media SMART outlines ‘doomsday’ scenario if tax renewal fails Marin Independent Journal The IRS Has It's Eye on Millionaire Tax Evaders: Are You One? Kiplinger's Personal Finance Taxes, state parks, infrastructure: What you need to know about the ... Temple Daily Telegram Top Kansas Republicans push flat tax proposal, pan Medicaid ... Kansas Reflector Amherst supervisors OKs meals tax hike Lynchburg News and Advance Trump advisers plot aggressive new tax cuts for second White ... The Washington Post Take Advantage of the Lifetime Estate and Gift Tax Exemption While ... Kiplinger's Personal Finance Property tax relief programs to reach more Philadelphians ... Philadelphia Water Department Pay Taxes Dare County, NC (.gov) |
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