Accounting News

Monday, September 19, 2011
Red Flags for IRS Audits

The IRS estimates that they fail to collect $350 billion in taxes every year. They are actively working to cut that number down. And as you might expect they are going to where the money is -- the richest tax payers. The audit rate for filers earning more than $10 million a year has expanded from 10.6% to 18.4%. Compare this to 8.4% for filers over $1 million and 1.1% overall. So if you are if you make more than $10 million then here are some red flags that will increase the chances of an audit.

Credit-card records. If you report a modest income but spend like a king you increase your chances for an audit. The IRS is doing credit card checks to make sure spending is at a reasonable level to income.

Business losses. The IRS is cracking down on losses reported as active investments. This requires the person to spend at least 500 hours doing work for the business. Losses for passive investments can only be used to offset passive investment gains.

Home interest. Another red flag is interest income on a home beyond what is expected. You are only allowed to deduct the interest on a first and second home. You can also deduct the interest on a home equity loan up to 10%.

Make sure you use a tax accountant who specializes in high wealth individuals to avoid any problems with the IRS.