IRS Audits can be reduced or avoided! IRS Red Flags exposed!

By Jeffrey Brooks, CPA, CFP of JBrooks Wealth Advisors, PC. A CPA and CFP professional firm. 602-687-9900 X 101 jeff@jbrookswa.com

What are most common ways to bring your personal return to the attention of the Internal Revenue Service? What are a few of the most common “red flags”?
1. the most common tax notice from the IRS is caused by differences between what you show and what IRS receives for interest income, dividend income, capital gains, and mortgage interest and from other tax informational form. What are a few of the forms? 1099 INT, 1099 DIV, 1098 Home mortgage interest and taxes, K-1s from investments.

2. Math errors and missing information. For example, failures to include a required tax form. I have one client who the IRS sent a letter that he failed to include the Alternative Minimum Tax form.

3. Not understanding the tax program and making errors that would be obvious to a tax professional..and to the IRS! For example, one client showed the 401K deduction on his personal tax return as an IRA deduction on the first page of his return.

4. Changing income from what is called passive to non-passive and then back again. A Passive investment interest in an investment like a partnership means you spent less than 500 hours per year in the investment. Passive losses only offset passive income. So if you treated an investment as passive in one year and non-passive in the next year, the IRS “ears” would perk up. This is a complicated area! I have taught classes to CPAs on this complex tax area.

5. Suspiciously low income — If you’re making much less than others in the same profession, that raises a flag.
Having a high income — Though less than one-percent of taxpayers are audited each year, those making over $100,000 are five times more likely to come under scrutiny.
6. Drastic changes in income — Unexplained fluctuations in income can indicate that something was underreported somewhere.
7. Round numbers — It’s unlikely that your investment returns were exactly $500, or that your mortgage interest deduction was $10,000. Too many round numbers doesn’t seem reasonable.
8. Too many charitable contributions-If the average person in your income bracket donates about $1000 to charity and you claim you donated $5000, you’re going to increase the odds of an audit. In fact, I received an audit for just charity due to giving too many dollars and items away in one year. I had sent the IRS a copy of the documents but not surprisingly the IRS did not look at it.
9. Participating in tax scams — The IRS is trained to deal with common evasion attempts.
10. High itemized deductions —the IRS has developed programs from successful IRS audits of those who showed too many deductions on Schedule A.
11. Disagreements between state and Federal returns

I hope this article is of help to you! Jeff Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC, a CPA and CFP professional firm.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com