Before reading this post, you may think to yourself, “Who thinks about tax season during the fall?” The answer is that tax attorneys and accountants generally do. But the better answer is that you should think about it as well. Regardless of whether you are starting a new business or a new job, part of your exercises towards financial independence should include steps to reduce your tax obligation and to protect yourself against unexpected tax obligations; not only for the upcoming tax year, but also for future years.
Part of these exercises includes the understanding of what can trigger an IRS audit. As such, this post will highlight a few of them.
Income matching – The IRS may match the income reported on a 1099 or W-2 form with the same reported on an individual tax return to make certain that income is accurately and properly reported.
DIF scoring – Known as the discriminant index function, this formula can affect chances that you will be audited. Of course, the IRS is not going to reveal exactly how this formula works, but consumers can expect that exceptional deductions, huge fluctuations in income and late payments are red flags that could trigger an audit.
Audits of related parties – If a company or family member that received payments from you or your business is audited, chances are that you may be investigated to ensure that the payments were actually reported.
If you have been notified that you are going to be subject to an audit, consulting with an experienced tax attorney can help.