AUDIT RED FLAGS
Presented by Rajesh Jyotishi
What raises eyebrows at the IRS?
Are you one of those taxpayers worried about
being audited? The fear may be overblown—
according to Internal Revenue Service data, just
1.6 million taxpayers were audited in 2011. The
agency reviewed about 1 percent of returns sent
in by taxpayers making less than $200,000, and
no more than 12 percent of millionaires had
their returns scrutinized.
Still, no one likes extra stress courtesy of the IRS. Self-employed individuals seem to be magnets
for audits—in fact, IRS data indicates that people who work for themselves and earn from
$100,000 to $200,000 yearly are five times more likely to get a second look from the agency
than the typical employee.
Let’s look at some red flags that might get you extra IRS scrutiny. (We’ll end on a positive
note—you or someone you know might be eligible for an unexpected federal tax refund from
A Schedule C that hints at some odd bookkeeping. Schedule Cs get a close look annually as
the IRS seeks to remedy the tax gap (the difference between federal taxes owed and federal taxes
paid). As Schedule Cs are often filled out by solopreneurs and small business owners themselves,
the chances increase for claiming substantial deductions that may be hard to substantiate.
Taxable income of $1 million or more. Millionaires work with accountants for a reason.
Generally speaking, returns prepared by tax professionals raise far fewer red flags than DIY
ones. If you will make around $1 million this year, look back at the first paragraph of this article
and consider whether or not it might be wise to defer some potentially taxable income into 2013.
Bad math. Calculators are readily available and they can be as crucial as software when it comes
to filing your federal return. The IRS does spot mediocre mathematics in returns. It has even
recalculated taxes to save people money in years when special tax credits were available, such as
the Making Work Pay credit. However, it also finds unreported and underreported taxable
income through the same scrutiny. In fact, the IRS found 4.2 million math errors last year on tax
returns for 2010.
Huge deductions. Is your money-losing small business venture truthfully just a hobby? Did you
really donate $4,000 worth of office supplies to a charity, and do you have the receipts to back
that up? The IRS routinely checks returns for deductions that seem outlandish.
Living large. Does the IRS peruse social media? Yes it does, just as many people do. The IRS
has done good detective work for years; its investigators know to check out DMV and
employment records to get a better picture of an errant taxpayer. Today, photos and posts on
Facebook, MySpace, and Twitter can telegraph potentially valuable nuggets of information,
particularly about young taxpayers who have come into wealth that their returns don’t seem to
If you’re reading this, you’re paying more attention than many others. That claim really
isn’t so grandiose—a staggering number of Americans pay scant attention to their federal taxes.
According to the 2012 Taxes and Savings Survey from Capital One Bank, 11 percent of
American taxpayers choose to file at the last minute. For that matter, about 5 percent of
Americans (that’s 7 million people) don’t file federal returns at all—and in some cases, it isn’t
just because they don’t earn enough taxable income.
P.S.: You or someone you know might be eligible for some money. The IRS has more than $1
billion in unclaimed refunds just waiting for U.S. taxpayers who didn’t send in federal tax
returns for the year 2008. The IRS estimates that the median such refund is $637. Are you or
someone you know eligible? Visit this webpage for more information:
www.irs.gov/newsroom/article/0,,id=254725,00.html. If you are eligible, you must file a 2008
federal return (and put it in the mail) ASAP.
Moneywise is hosted by Rajesh Jyotishi with Shalin Financial Services, Inc. Rajesh is an
investment advisor representative of Resource Horizons Group, L.L.C., a registered broker-
dealer, and a member FINRA/SIPC. Advisory services are offered through Resource Horizons
Investment Advisory. Rajesh has been in the insurance, investments and financial planning field
since 1991. He can be reached at 770-451-1932, ext. 101 or at RJ@shalinfinancial.com.
Published by Khabar Magazine, Moneywise section June 2012.