While a number of our posts at this time of year focus on preparing one’s tax return. After all, who doesn’t want to gain a refund after filing an income tax return? More importantly, who actually wants to write a huge check to Uncle Sam?
But what taxpayers fear more than owing money to the government is being subject to an IRS audit. It is safe to say that getting root canals and prostate examinations are more desirable.
Nevertheless, part of minimizing the pain of an audit involves being prepared for what is to come. As such, it is critical to understand what can trigger an IRS audit. This post will highlight a few of common things that could generate an audit.
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.
Audits of related parties – If you regularly do business with a particular company or family member that has been audited or has had problems with the IRS in general, chances are that you may be investigated to ensure that the payments or expenses were accurately reported.
DIF scoring - The discriminant index function is a formula that the IRS uses to evaluate whether a particular return should be subject to an audit. Naturally, the specifics of this formula remains a closely guarded secret, but it is important to understand that fluctuations in income and irregular expenses are unusual expenditures that could trigger an audit.
If the IRS has notified you about an audit, consulting with an experienced tax attorney can help.