IRS Audit Red Flags

The following are the latest items the IRS focuses on for Tax Audits:

1. Company Cars - Employers frequently don't report the taxable benefit that employees receive from their personal use of company-owned cars. The IRS plans to focus on the use of company cars, especially "luxury" models, in its next series of audits. 

2. High Income Taxpayers -  The IRS will aggressively pursue self-employed taxpayers with gross income of more than $1 million. In 2011, the IRS audited 12.5 percent of all individuals with incomes of more than $1 million (up from 8.4 percent in 2010). These audits are frequently performed by the LB&I audit groups and are much more invasive than typical audits. These audits should always be fought with a tax attorney.

3. Form 1099-K Matching - Form 1099-K (credit card) matching payee statements with receipts will be the focus of small business auditing. This is the new "cash audit" program and will focus on restaurants and formerly cash businesses. 

4. Health Insurance Credits - The IRS will examine employers and nonprofits to determine eligibility under the health care  credit.


5. Foreign Transactions - In recent years, the IRS has stepped up efforts to uncover assets in overseas accounts. It will continue to focus on offshore transactions made by individuals and businesses. The IRS uses an extremely complex tax shelter Information Document Request. Anyone with a foreign account, or even some investments that have foreign assets may be placed under high scrutiny.

6. Partnerships - the IRS is targeting partnerships that have reported large losses or have so-called "suspicious transactions".


7. S Corporations - S corporations are increasingly being targeted for in-depth audits.  A main issue is the use of S corporation distributions to avoid payment of Social Security tax.

8. Worker Classifications - The government hates independent contractors because it allows workers to get more deductions and businesses to forgo withholding. The IRS is continuing the attack on businesses with independent contractors. 


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