Helen Writings
Including certain information on your tax return (or omitting certain information!) may cause the IRS to pay special attention to your tax return-and not in a good way.
The IRS knows there are certain areas on a tax return where it is more likely for people to either make errors or to try and misrepresent their income and/or expenses. As a result, the IRS focuses its efforts for auditing on these areas. Solve your unfiled tax returns problems.
Below are several of the red flags that can increase the likelihood of having your tax return audited by the IRS. If you have any of the situations described below, the IRS may look closer at your return—if you have a combination of the situations described below, you should review How to Survive an Audit.
Filing a Return with No AGI
A return that is filed with an Adjusted Gross Income of $0 has a higher chance of being audited than returns with income ranging from $1-$200,000. Of the approximate 2.9 million returns that were filed with no Adjusted Gross Income, 2.15% of them were audited by the IRS in 2008. That’s higher than the approximate .8% of individuals with an Adjusted Gross Income between $1 and $199,999 who were audited by the IRS.
The IRS wants to make sure that income is not being left off of the return or that excessive deductions are not being claimed..
Filing a Return with a Schedule C
If you file a return with a Schedule C, your chances of being audited increase from .4% (the percentage of non-business returns that were audited in 2008) to 2.5% (the average percentage of business returns that were audited in 2008).
A Schedule C is a popular place for taxpayers to over deduct expenses-along with itemized deductions, as discussed below. The IRS wants to make sure that deductions are legitimate and that income being reported matches a taxpayer’s 1099-MISC.
Filing a Return with an Adjusted Gross Income Greater than $200,000
Once your Adjusted Gross Income is above $200,000, your chances of being audited increase. In 2008:
1.92% of returns with Adjusted Gross Income ranging from $200,000 to $499,999 were audited (approximately 59,551 of 3.1 million)
2.98% of returns with Adjusted Gross Income ranging from $500,000 to $999,999 were audited (approximately 17,664 of 592,753)
4.02% of returns with Adjusted Gross Income ranging from $1,000,000 to $4,999,999 were audited (approximately 12,746 of 317,054)
6.47% of returns with Adjusted Gross Income ranging from $5,000,000 to $9,999,999 were audited (approximately 1,784 of 27,570)
9.77% of returns with Adjusted Gross Income above $10,000,000 were audited (approximately 1,347 of 13,785)
Higher Adjusted Gross Incomes are usually a result of income other than wages. The IRS reviews these other income types (such as investment income or business income) with more scrutiny, since it is easier to try and manipulate these numbers than wages.
Claiming the Earned Income Credit
Taxpayers with an Adjusted Gross Income of less than $200,000 that claim the Earned Income Credit have a 2.75% chance of being audited—compared to a 1.76% chance of being audited if your Adjusted Gross Income was less than $200,000 and you did not claim the Earned Income Credit.
The Earned Income Credit gives you a tax credit of up to $4,824. The IRS reviews returns that claim the Earned Income Credit to make sure that all qualifications have been met, and that a taxpayer is not erroneously claiming the credit or claiming the credit in order to lower his/her taxes.
Claiming the Home Office Deduction (Form 8829)
A return with a Schedule C expense for use of the home office is more likely to be selected for audit than a return with a Schedule C without any expenses for the use of the home office.
This deduction can only be used for EXCLUSIVE business use of your home and the IRS reviews these claims to make sure they are accurate.
Filing a Return with a Schedule E/Form 2106
A return with either a Schedule E (Supplemental Income or Loss) or Form 2106 (Employee Business Expenses) increases the chance of being audited from .4% (the percent of non-business returns without earned income credit that do not have a Schedule C, E, F, or Form 2106 that are audited) to 1.3% (the percent of non-business returns with a Schedule E or Form 2106 that are audited).
The IRS reviews these returns closely in order to make sure that taxpayers are reporting all of their income on the Schedule E and to make sure that taxpayers are not purposefully over deducting or incorrectly deducting business expenses on Form 2106.
Filing a Return with Abnormally High Itemized Deductions
Whether or not your itemized deductions are abnormally high is relative to your Adjusted Gross Income. The higher your Adjusted Gross Income, the higher your itemized deductions could realistically be. A return with an Adjusted Gross Income of $120,000 could claim $20,000 in itemized deductions without raising as much suspicion as a return with an Adjusted Gross Income of $40,000 claiming $20,000 in itemized deductions would.
As your itemized deductions equal a higher percentage of your Adjusted Gross Income, it is more likely that the IRS may select your return for an audit. The IRS wants to make sure that false expenses are not being claimed in an effort to lower tax liability.
Also don’t forget your back taxes.
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Tags: Back Taxes
Posted in Taxes · May 11th, 2010 · Comments (0)
It’s after April 15th and most tax returns have been filed, hopefully you don’t have any unfiled returns. But, some people may be left wondering how they are going to pay the amount they owe. While there are a several options available to individuals, the Offer in Compromise, or settlement, gets the majority of press time, especially in the infamous “pennies on the dollar” commercials. These commercials never say just unusual it is for the IRS to actually approve an Offer in Compromises (OIC) for individuals. Before you go to the trouble and expense of hiring someone to file an Offer in Compromise for you, keep the following facts in mind.
There are three types of OICs:
Doubt as to Collectability
Doubt as to Liability
Effective Tax Administration
Make sure that if you do decide to file an OIC, you file the correct one. For example, filing a Doubt as to Collectability OIC when you think you should not have a tax balance due would be a mistake.
‘The IRS has to accept my offer’ myth
While this is actually based on fact, the majority of individuals do not know the entire story. Just because you file an OIC does not mean that the IRS will accept it. In fact, in 2009 only 0.113% of individuals with a tax balance had an OIC accepted. That gives you about a 1 in 1,000 chance of having your OIC accepted. If there is a way for the IRS to receive payment of your tax liability, through a lump sum full payment or an installment agreement, your OIC will not be accepted.
The factual part of this myth stems from IRC 7122(f) which states that the IRS does have to accept an Offer in Compromise, if it is not withdrawn, returned, or rejected within twenty-four months of the IRS receipt date. This rarely happens, however, and should not be your basis for filing an OIC.
The down payment and application fee are non-refundable
When you send in your down payment and application fee, you won’t be getting that money back. Whether or not the IRS accepts your Offer in Compromise does not matter – the down payment is kept and applied in the government’s best interest (which is usually your oldest tax liability). The application fee won’t even be applied to your liability – it is just a processing fee.
You will extend how long the IRS can collect
When you file an OIC, you automatically extend the ten-year limit that the IRS has to collect on your unpaid tax. The IRS adds the number of days your OIC is in review, plus an additional thirty days, to your Collection Statute Expiration Date. So if your OIC is not accepted, you are right back where you started and the IRS has more time to try and collect the tax.
Consideration of offers
The IRS won’t even consider your Offer in Compromise if it doesn’t meet the minimum requirements:
Down payment must be submitted with the OIC (unless you qualify for an exemption of the payment)
Application fee of $150 must be submitted with the OIC
You have submitted an OIC that is equal to at least your Reasonable Collection Potential
You cannot submit an OIC while you are in bankruptcy
All of your past returns must have been filed – you must not have any Unfiled Tax Returns
You must be current on your withholding or estimated tax payments for the current yearv
You must submit Form 656 and Form 433A
You don’t have to send the entire amount to the IRS at once
If you are lucky enough to have your OIC accepted, you are not required to mail in the total amount that the IRS agreed to. You certainly can if you have the means to do so, but the IRS does allow the payments to be made over a number of months, depending on the payment arrangement that you request.
Frivolous Offer
If you file an OIC knowing that it will not be accepted and do so only to delay the IRS’ collection efforts, you may receive a $5,000 penalty. Make sure that you meet all of the requirements for submitting an OIC and have good reason to believe that the IRS will accept your OIC.
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Tags: offer in compromise
Posted in Taxes · May 2nd, 2010 · Comments (0)