Foreign income is especially notworthy as a trigger for audits, advisors said.
“For foreign income and tax reporting, the fun is only beginning,” LaForgia said, adding that the IRS Large Business and International Division “is obviously looking for taxpayers showing large foreign income and credits on their return. ... This year, Schedule K-2 and K-3 reporting has started for entities to make it easier for the IRS to trace from individual returns back to the entities.”
“Math errors and showing too much income are the easy ways to get audits,” said attorney Toby Mathis, founding partner of Anderson Business Advisors and manager in Las Vegas office. The types of taxpayers who seem to get audited at a high rate include “so-called ‘traders’ in securities who deduct expenses on Schedule C as an active trade or business but report income on Schedule D.”
“I believe the IRS focuses on sole proprietors, taxpayers who report business income and expenses on their personal return via Schedule C,” he added, “so I’m certain this causes most of those audits. In my experience, the IRS tends to be suspicious of sole proprietors who report losses year after year on Schedule C; even those taxpayers who report positive income appear to be a target.”
Rumors abound that the short-handed, under-funded IRS can’t audit the way it used to. This is both true and false, advisors said.
“The IRS has been more reliant on computers matching tax information. In some ways the biggest red flags are not reporting items or reporting items inconsistently with tax information that gets reported,” Donnellan said. “Wait for tax documents and try not to forget any items that occurred over the tax year.”