Five Audit Attractors to Watch Out For

By Bonnie Lee of Entrepreneur.com



This article has been excerpted from Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn't Want You To Know, available from Entrepreneurpress.com.

The IRS will never tell you why a particular tax return is under audit. However, there are certain factors that make it obvious why a tax return was selected.

What Triggers an Audit?
Following is a comprehensive list of things that can trigger an Internal Revenue Service audit:

Failure to include income that has been reported to the IRS
During the month of January, you receive tax documents in the mail declaring income and certain expenses that relate to your tax return. For example:

• 1099-INT declaring the amount of interest income you've received from various sources including banks and investment companies
  
• 1099-DIV declaring the amount of dividends you have been paid on your investments
  
• 1099-MISC for work as an independent contractor and for rental income from tenants of your commercial properties
  
• W-2s and K-1s

The Internal Revenue Service receives this same information. When you file your tax return, the IRS plays a matching game to ensure that you have declared all of this income on your tax return. If you have not, the IRS will recalculate your tax liability and bill you accordingly. Also considered an audit, it's basically a by-mail correction notice that is open to dispute.

Severe departure from the national standards
The IRS has a construction of tables, available on its Web site at irs.gov, that indicate by income level and if self-employed, by industry, an average of deductions taken in any given tax year. If your numbers are significantly different than the national averages, you may find your tax return up for scrutiny. Red flags include vehicle expense; charitable contributions, especially noncash ones; meals, entertainment, and travel; and excessively high cost of goods sold.

Dramatic change in income and expenses from one year to the next
You may experience a financial downturn that throws you into a loss situation. The IRS may audit just because it is interested in what happened and whether or not you are hiding income. Or if your income suddenly increases, the IRS may be suspicious that you cheated in the past and are now coming clean.