WASHINGTON – April 4, 2011 – With a growing federal deficit and pressure from Congress, the number of audits from the IRS is increasing – could your tax return be at risk?
According to Bankrate.com, the IRS says that individual income tax returns reporting higher adjusted gross incomes were likely to get closely examined, and small business owners, either as a partnership or a Schedule C filer reporting self-employment income, are always prime targets.
So how does the IRS select the returns it will audit? One way is its use of a computer-scoring system known as the Discriminant Information Function, which it uses to evaluate tax returns based on IRS formulas. DIF considers tax deductions, credits and exemptions, with standards for taxpayers in each income tax bracket.
The actual scoring formula the IRS uses, however, is top secret.
Here are some possible red flags that may alarm the IRS’ DIF, according to Bankrate.com:
• Home-based businesses, especially when in addition to salary income, and home-office deductions.
• Income other than basic wages (for example, contract payments).
• Unreported income, such as investment returns.
• Large business meal and entertainment deductions.
• Excessive use of a car for business.
• Losses from an activity that may be considered more as a hobby than a business.
Read more about IRS tax audit red flags, visit bankrate.com.
Source: “Red flags that tempt the tax auditor,” Bankrate.com (March 31, 2011)
© Copyright 2011 INFORMATION, INC. Bethesda, MD (301) 215-4688
According to Bankrate.com, the IRS says that individual income tax returns reporting higher adjusted gross incomes were likely to get closely examined, and small business owners, either as a partnership or a Schedule C filer reporting self-employment income, are always prime targets.
So how does the IRS select the returns it will audit? One way is its use of a computer-scoring system known as the Discriminant Information Function, which it uses to evaluate tax returns based on IRS formulas. DIF considers tax deductions, credits and exemptions, with standards for taxpayers in each income tax bracket.
The actual scoring formula the IRS uses, however, is top secret.
Here are some possible red flags that may alarm the IRS’ DIF, according to Bankrate.com:
• Home-based businesses, especially when in addition to salary income, and home-office deductions.
• Income other than basic wages (for example, contract payments).
• Unreported income, such as investment returns.
• Large business meal and entertainment deductions.
• Excessive use of a car for business.
• Losses from an activity that may be considered more as a hobby than a business.
Read more about IRS tax audit red flags, visit bankrate.com.
Source: “Red flags that tempt the tax auditor,” Bankrate.com (March 31, 2011)
© Copyright 2011 INFORMATION, INC. Bethesda, MD (301) 215-4688
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