Grow Smart Business


Search Articles

Are You at Risk for an IRS Audit This Year?

August 9th, 2011 ::

By Maria Valdez Haubrich

Are you likely to get audited by the IRS this year? The IRS is cracking down and expanding its investigations into more groups of taxpayers, The Fiscal Times recently reported.

The reasons for the crackdown are pretty obvious: Like everyone else, the federal government is hurting for cash and is seeking to get the full amount it’s rightly owed. It is focusing on high-income taxpayers and is being less sympathetic or flexible than in years past, according to accountants cited in the article.

The number of IRS agents enforcing audits shrank in 1998 and still isn’t back to pre-1998 levels, but has risen to 22,710 agents, up from fewer than 20,000 in 2004. That’s making it easier for the IRS to expand its enforcement efforts.

Last year, 1.1 percent of all taxpayers were audited. But business owners who file Schedule C Forms were audited at a rate of slightly more than 4 percent. Why? This group is estimated to be underreporting income by some $68 billion a year. High-income taxpayers are also a target; for those earning more than $200,000 in 2010, the audit rate was 3.1 percent, and for taxpayers earning more than $1 million, it was 8.1 percent.

But you don’t have to fit into one of those categories to get audited. One expert The Fiscal Times spoke to notes that by cracking down on someone who represents a large category of taxpayers—such as a sole proprietor—the IRS can increase compliance in that overall category. Why? That person’s friends and associates will hear of the audit and be scared into changing their behavior.

What are some red flags that could peg you for an audit? According to The Fiscal Times, they include:

  • Credit card statements that don’t jibe with tax returns. (The IRS will be cross-checking this year.)
  • Returns that claim refundable tax credits
  • Over-reporting deductions
  • Having offshore accounts
  • Claiming an oversized interest deductions for home loans
    Claiming the adoption credit (it was raised last year, giving rise to increased fraud)
  • Failing to report and pay taxes on gifts of real property
    to find taxpayers who haven’t disclosed real estate gifts,
  • Making overly large charitable donations relative to your income

Talk to your accountant about possible risks of an audit if any of these factors apply to you. With the IRS expanding its reach, it’s better to be safe than sorry.

Image by Flickr user Vectorportal (Creative Commons)

 DISCLAIMER: The information posted in this blog is provided for informational purposes. Legal information is not the same as legal advice — the application of law to an individual’s specific circumstances. The information presented here is not to be construed as legal or tax advice. Network Solutions recommends that you consult an attorney or tax consultant if you want professional assurance that the information posted, and your interpretation of it, is appropriate to your particular business.

The views expressed here are the author's alone and not those of Network Solutions or its partners.

Get more small business resources from Network Solutions

Web.com is now offering forums designed to support small businesses in cities throughout the US. Learn more about these forums here: http://Businessforum.web.com/

Tags: ,
Posted in Accounting and Taxes, Compliance, Small Business, small business | No Comments »