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Raise Your Hand If You Want To Be Audited

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Raise Your Hand If You Want To Be Audited



Most of us are aware that certain issues are more likely to give rise to an audit than others — and Laurie Kazenoff has seen them all.

A former senior attorney with Internal Revenue Service Chief Counsel and currently a partner at New York-based Moritt Hock & Hamroff LLP, Kazenoff said that the IRS consistently looks for a number of red flags on individual and business returns.

“You can be audited for any reason, but there are common areas that are on the IRS radar,” she said. “The higher your income, the more likely you are to be audited, but the most commonly audited areas are Schedule Cs because of the opportunity to fudge the numbers by understating income or inflating deductions such as home office or other expenses.”

“If the numbers are outside the norm, the computers will pick it up,” Kazenoff cautioned. “Most fields on a return are compared to averages, and outliers will be targeted. Large losses on both individual and business returns will be flagged. If you’re a going concern and have enormous losses, they want to know how you’re supporting yourself, or how you stay in business. If the numbers fall outside the national average, there’s a good chance of being picked up for an examination.”

Missing information is an area sure to trigger a notice, according to Kazenoff. “Many people don’t realize that the IRS matches every piece of third-party reporting with what taxpayers put on their return,” she said. “This includes interest income, dividend income, independent contractor income as well as W-2 income — the issuer is required to report it both to the taxpayer and the IRS. If the taxpayer fails to report the figures on their return — to the penny — the matching system will flag the return and they will receive a letter from the IRS.”

Not every industry is considered an equal risk, according to Kazenoff. “The service issues a list of industries they target, such as the mining industry," she said. “And there are businesses that have historically underreported income. Businesses where cash changes hands, such as restaurants and laundromats, are examples. But although gas stations deal in cash, they have an independent record-keeping system.”

The IRS also targets independent contractor situations, Kazenoff noted: “Are the workers really employees?”

Worker misclassification is an important issue for the IRS and various state taxing authorities because of the perception that many employers are not properly classifying their workers. By avoiding labeling their workers as employees, employers can avoid paying payroll taxes, minimum wages, overtime, health and retirement benefits, and paid leave.

“A lot of companies try to avoid payroll taxes, workers compensation and unemployment withholding,” she said. “They think they can get off the hook, but it’s an issue the IRS will pursue.” Although there is no bright-line test to judge whether a worker is an employee or an independent contractor, “[The IRS] will look to see if certain factors are present to determine if the worker is really an independent contractor,” she said.

Filing a large claim for a refund on an amended return will almost always cause an audit, according to Kazenoff. “They will wonder what you did wrong on the first return,” she said. “It will almost always be picked up.”

“If the original return failed to include an item of income, of course you will want to correct it on an amended return,” she said. “But filing an amended return that claims credits that you didn’t claim on the first return will open up the whole return to scrutiny, so you end up being audited on other things not originally at issue.”

This is particularly true where the amended return raises new issues, she indicated. “As an example, a return might be amended to claim R&D credits that weren’t on the original return. The IRS is likely to audit for that particular issue, but will open up the entire return for questioning,” she said.

Provided By: Accounting Today