Avoid a personal tax audit by addressing potential red flags

April 12, 2014 (Press-News.org) Many individuals across the nation already completed their tax filing obligations -- or gave themselves extra time by filing extensions -- but the tension is still hanging in the air. For many, this time of year is fraught with nervousness regarding a potential audit by the Internal Revenue Service (IRS). Filers in California are in the spotlight each year as they file a higher number of federal tax returns than do other states, according to the IRS Databook.

An IRS audit can take months or years to complete and is often a harrowing experience. Not only is an audit a time-consuming process, it can be quite expensive and potentially exposes the filer to criminal charges and steep penalties, fines and interest payments.

If you receive a letter from the IRS, it does not automatically indicate an audit, however. There are three basic reasons the agency may contact you after filing your tax return:
- Matching: Typically, a matching request is merely a request for a document verifying an entry on -- or absent from -- your return, such as a missing 1099 or W-2.
- Examination: This may occur when the IRS needs additional information to validate a particular claim, such as a deduction.
- Audit: An audit is a thorough inspection of your financial records, verifying income, deductions and every additional aspect of your tax filing.

Potential audit triggers

While the IRS does not publish the reasons why it may audit one person over another, an analysis of past behavior of the agency reveals certain trends and triggering events. Awareness of these red flag issues may help you sidestep an audit or, at least, let you know which income or deduction entries may require more documentation in order to substantiate your claim.
- Failing to report all of your income is the most common issue that can trigger an audit. The IRS receives documentation from all of your sources of income and it may be easy to overlook one -- such as an old brokerage account.

- Claiming a mortgage deduction that is larger than the average for your level of income may cause the IRS to take a closer look. There are limits to the amount of interest you can deduct -- unless it is based on the original debt for your home -- so watch those levels when including interest from home equity lines and refinances.

- High amounts of charitable donations can cause increased scrutiny of your return, especially non-cash donations in excess of $500. Be sure to obtain an appraisal of any big-ticket item given to a charity -- such as an expensive automobile or piece of real property.

- There are strict reporting rules for foreign bank accounts and, although checking the box to indicate you have such an account can trigger an audit, failure to comply with the reporting requirement can subject you to legal liability and stiff penalties.

When to consult a lawyer

If you have a very high net worth, claim deductions at a higher level than your income indicates or maintain foreign bank accounts, consult a tax law attorney prior to filing your taxes each year. If you have already filed your taxes and have been contacted by the IRS regarding your return, a lawyer experienced with tax litigation, controversies and audits can help.

Article provided by Brown, PC
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