What Triggers an IRS Audit?

triggers irs audit

San Diego Tax Attorney, John Milikowsky

IRS selects returns for audit based on numerous criteria. Here are some common ways your return can be selected for an audit:

  1. You fail to report income that reported on a W2 or 1099 (this can be from a sale of real estate, 1099-S; non-employee compensation as an IC; 1099-MISC now a 1099-NEC (non-employee comp); or withdrawing proceeds from a retirement account, 1099-R)
  2. You fail to report all of the income received by your business. For instance, if your company receives credit card payments, your merchant provider will send you a 1099-K every year. The 1099-K will summarize the gross proceeds you received each month and the total for the year. If the gross proceeds you report on your return are less than the 1099-K income, this may indicate you are underreporting your income. There are many legitimate explanations for why your gross income is less than the amount on your 1099-K.  But how you report and explain the difference in your tax return can make a difference between being selected and not being selected for an audit.
  3. You amend your income tax return to claim a refund.
  4. If you have a business, reporting a loss for more than 1 year can trigger an audit especially if the loss will offset other income reported on your tax return.
  5. Having a business that is really a hobby such as placing a yacht or aircraft in a business entity and reporting a loss. The question here is whether this is a business or a hobby. A business will have an intent to make a profit and you will be expected to establish you are attempting to get clients and have necessary and ordinary business expenses.

Other ways: IRS has an algorithm and assigns a score to your return. Based on that score, IRS may select your return for examination and send your file to an IRS office in your local city.

If you receive a letter from IRS confirming your return has been selected for examination, contact a qualified tax attorney to review your return and identify the items that will likely be investigated so you can be prepared before communicating with IRS. Having a game plan is critical. You want to be honest but prepared when speaking with IRS.

John D. Milikowsky

Founder of Milikowsky Tax Law

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