At Terrence A. Grady and Associates, we provide legal services for individuals, businesses, and more in Columbus, OH, including for those being audited by the IRS. Over the past few years, the IRS has hired hundreds of new Revenue Agents tasked with increasing the number of IRS audits. The IRS views enforcement of tax law to be the key component of the United States tax system. The IRS considers enforcement, including tax audits, as helping to promote the public’s confidence in the tax system by pursuing individuals and businesses that do not comply with tax obligations.
The IRS audit selection criteria are designed to identify tax returns with the highest potential for noncompliance issues. As the IRS explains on its website, tax returns are identified for audit using “risk based scoring mechanisms, data driven algorithms, third party information, whistleblowers and information provided by the taxpayer.” The IRS also has task forces designed to audit specific tax credits and schemes.
Some of the most common reasons for an IRS audit include the following:
The IRS’s data and the National Research Program (NRP) estimate that approximately 50% of all Earned Income Tax Credit (EITC) claims have errors and that there is $18.1 billion paid out improperly. In the last two fiscal years, the IRS increased the number of EITC returns audited.
Unreported 1099 Income
The IRS has an automated underreported program and is able to match tax returns to third-party income documents received (1098s, 1099s, and W-2s). This program is a significant factor in why individuals and businesses are audited by the IRS.
Home Office Deduction
Home office deductions have always been considered a “red flag” for tax audit purposes, and including them when filing your taxes can be risky.
Car & Truck Expenses
The Internal Revenue Code imposes high substantiation requirements for taxpayers claiming car and truck expenses. To successfully defend car and truck expenses in an IRS audit, it is critically important that the taxpayer maintain documentation, including receipts, invoices, and mileage logs, to support the car & truck expenses claimed on the return.
The IRS selects many returns claiming rental losses for audit – particularly when the taxpayer uses rental losses to offset other ordinary income. The IRS audits these returns and determines whether the taxpayer qualifies as a real estate professional, which means there must be documentation to prove that the individual works a sufficient amount of time in the real estate business, or whether the passive activity loss limitation rules apply.
Third-Party Information from Large Cash Transactions:
The IRS does review and investigate FinCEN Forms 8300 that report cash payments over $10,000. In addition to these forms, banks and other financial institutions also file Suspicious Activity Reports (SARs) or Suspicious Transaction Reports (STRs) that are regularly reviewed and can be a reason for a civil audit or criminal investigation.
Return Preparer Investigations
The IRS developed task forces and audit groups solely to audit and review tax return preparers and compliance with due diligence requirements for EITC and other similar tax credit programs.
The IRS has implemented programs to review and audit large charitable contribution deductions. Most recently, the IRS has focused on certain types of charitable deductions for audits. Conservation easements are seen as having the potential to be an abusive transaction. The IRS explains that “taxpayers, often encouraged by promoters and armed with questionable appraisals, take inappropriately large deductions for easements.”
ERTC & Other COVID Relief Programs
In a recent IRS News Release (IRS News Release IR-2023-105), the IRS warns businesses to watch out for fraudulent and misleading ERTC (Employee Retention Tax Credit) promoters. In relation to that risk, the IRS stepped up its audit and criminal investigation units to work these claims. According to the IRS, “’[t]his is an ongoing priority area in many ways, and the IRS continues to increase compliance work involving ERC. The IRS has trained auditors examining ERC claims posing the greatest risk, and the IRS Criminal Investigation Division is working to identify fraud and promoters of fraudulent claims.”
The IRS is also frequently investigating filers who have taken advantage of COVID-19 pandemic relief programs to ensure proper compliance.
Contact Us for Tax Law Services & Representation Today!
At Terrence A. Grady & Associates, we understand that there are many reasons why you may be audited by the IRS in Columbus, OH or anywhere else in the U.S. If you receive a letter from the IRS notifying you of a tax audit, contact the tax professionals at Terrence A. Grady & Associates. We can work with you to determine your audit risks and represent you and your company before the IRS.