Common targets of audits include cash-oriented small businesses, landlords that claim consecutive losses, taxpayers at both ends of the income spectrum, independent contractors, and people who have substantial transactions involving Bitcoin or other cryptocurrencies. Even if you have completed your tax reporting honestly, you may still face an audit, so it is important to prepare ahead of time.
At the Tax Law Offices of David W. Klasing, our Dual Licensed Tax Attorneys and CPAs can help you come up with an effective, viable strategy for avoiding audits and limiting losses. We represent clients nationally and internationally in tax audits. If you are already facing an audit, we can help you organize your records and advocate on your behalf in dealing with IRS agents. Discuss your situation today by calling our offices at (800) 681-1295 or using the following LINK to book a reduced rate initial consultation.
Most Likely Targets of an IRS Audit
The IRS can and will institute a formal audit against any taxpayer. However, we can see from data and experience that some are more likely targets for an audit than others. Below are some of the types of individuals and businesses that may deal with audits at a substantially higher rate, as well as the reasons why.
Businesses that engage in large amounts of cash transactions
Cash businesses are ripe with opportunity to deceive the IRS. This has become particularly true in the past two years, which saw many small business owners obtain government relief through programs created in the face of the COVID-19 pandemic, such as the Paycheck Protection Program (PPP).
It is becoming clear that a substantial number of business owners who received PPP loans used them for their own personal use, instead of paying their employees as intended. The government has instituted a major effort to track down pandemic relief program abusers, meaning that if you or your small business received any benefits through programs like PPP, you are relatively more likely to face an audit.
Another reason why cash businesses may be targeted with an audit is suspicion of misclassifying employees. Some businesses, either purposefully or mistakenly, improperly classify their employees as independent contractors, which may provide improper tax relief to the business. Discuss the differences between traditional employees and independent contractors with our Dual Licensed Tax Attorneys and CPAs today to avoid any of the consequences that might accompany a misclassification.
Landlords that Claim Consistent Losses
Taxpayers who earn up to $100,000 in annual income and rent property to others may take up to $25,000 in ordinary deductions for rental property expenses and losses. However, this $25,000 limit only applies if the taxpayer spends 50% or less of their working hours or less than 750 hours per year managing the rental property. If managing the rental property takes a substantial amount of time for the taxpayer, they are not bound by the limit. However, claiming to be a real estate professional puts a very large target on your back as to a future audit. This will not occur if you overall have profits from real estate activity. It becomes likely the moment you throw off deductible real estate losses. The IRS takes a substantial interest in these situations. They will want to ensure that you are spending the amount of time on managing these properties that you claim to be. The most effective way for the government to do this might be to institute an audit.
According to data collected by Syracuse University’s Transactional Records Access Clearinghouse, taxpayers who earn more than $1 million in annual income are audited at an average rate of 2.2%, which constitutes the highest rate of any segment of earners.
There are a few notable explanations for this statistic. The technical reality is that high-income taxpayers are more likely to use complex tax strategies to account for unique revenue streams. But the practical explanation is that an audit on an individual with a high net income is more likely to return a higher dollar amount to the IRS than an audit on an average American might.
On the other end of the spectrum, taxpayers earning $25,000 or less are nearly five times as likely to face an audit than those who earn between $25,000 and $1 million. The simplest explanation for this is that these taxpayers are usually eligible for the earned income tax credit, which is estimated to account for roughly $17 billion annually in improper claims.
Schedule C Filers
With the rise in popularity of the gig economy over the past several years, more and more taxpayers are classified as self-employed. In these situations, the taxpayer is required to submit Schedule C on their annual tax return. Any large losses, high deductions against income, or write-offs for large expenses will attract the IRS’ attention to a Schedule C Filer. This is even more likely where large W2 earnings are consistently being offset with Schedule C losses, which is a very common fraud technique.
To help root out mistakes for self-employed taxpayers, the government has taken to requiring some relevant cash processing services like Venmo and CashApp, to provide information about any accounts that make or receive payments exceeding certain thresholds for value or frequency. This may create a discrepancy for which taxpayers will need to prepare by keeping accurate records. If your reported gross income is significantly less than the sum of your K-1’s, expect to get audited by the IRS.
Crypto assets blur the line between what is considered currency and what is considered property. Nevertheless, the government requires anyone who holds or trades cryptocurrencies to report their gains and losses on Form 1040. Out of necessity, the IRS has become much more technologically adept in tracking cryptocurrency transactions including the use of John Doe summonses against Coinbase and Kraken. The best way to avoid any issues in your crypto reporting is to keep careful records of transaction dates and times, as well as the market value of the asset that you traded on the transaction date.
Concerned About an Audit? The Tax Law Offices of David W. Klasing Can Help
Defend against audits or avoid them altogether with the help of our Dual Licensed Tax Attorneys and CPAs. To get started, call the Tax Law Offices of David W. Klasing today at (800) 681-1295.
If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
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Esq. M.S.-Tax CPA
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