What To Know About IRS Audits And What You Can Do To Avoid Them

While there is no way to know exactly why some tax returns get audited and others don’t, there are some patterns that are often seen in the returns that get pulled for audits. If you can avoid these “red flags” from the IRS, you can reduce your chances of getting audited. 

If you’re a Columbus, OH taxpayer and you’ve been audited or are worried about an audit, get in touch with the McGuire Law Firm to understand your rights. 

Why Do Certain Tax Returns Get Audited by the IRS?

The IRS has the power to audit individual, corporate and individual income tax returns as well as other returns and propose adjustments to the tax returns that may lead to additional tax being due.  That being said, why does the IRS audit certain tax returns over other returns?  While you may never know exactly why your tax return was pulled for an audit by the IRS, below is a list of common facts that we as tax attorneys see have likely led to the audit by the IRS.

Low Profit Margin or Large Loss From a Business Income Tax Return

Many of the income tax returns we see that are under audit have a common theme regarding the net income of the business.  This common theme is that the profit margin for the business is very low and/or the business is showing a large loss or may have shown a large loss for multiple tax years.  A low profit margin would be the net income of a business in relation to the businesses gross or total income.  For example, if a business shows gross income of $200,000 and net income of $10,000, the business has a profit margin of 5%.  While some businesses historically have a low profit margin and must spend a lot of money to make money, many businesses do not and this low profit margin can be a red flag for the IRS.  Further, if a business historically shows a loss, the IRS may wonder how or why the business is actually still in business and if in fact the income tax returns are correct.  From a practical point of view, if the business is the sole source or majority of the individual’s income, you also have to ask, does it make sense that the taxpayer could afford their lifestyle with the net income from the business.  For example, if an induvial is the sole shareholder of an S corporation or member of an LLC and historically shows income of $10,000 or maybe even $20,000, does it make sense that the taxpayer can live and pay for their individual living expenses off of the net income of the business.  The net income of the business should be what the individual then has to support themselves and/or their family.  Thus, it is very common to see the IRS pick up returns for audit when the business shows low net income.  

Large Expense Amount for Meals, Travel or Auto Expense

For some reason, many people like to take their personal expenses for meals, travel and/or automobile expenses on their income tax return thinking they are deductible.  While a taxpayer can deduct the necessary and ordinary business expenses for these categories, the ability to deduct these expenses is not always as broad as taxpayer’s may think.  A taxpayer cannot simply deduct all meals eaten during their work day because they are “working.”  The meal must have more of a business purpose such as a meeting or a tie to networking or marketing.  Further, not all travel for a single meeting may be deductible.  Many taxpayers may fly somewhere for a meeting, get a hotel and incur other expenses but perhaps they stay at the location and spend personal time or vacation time.  Thus, not all of the travel expenses should be deductible and the taxpayer should consider some type of allocation as to what are legitimate business deductions versus non-deductible personal expenses.

Third Party Reporting

The IRS allows third parties to complete forms and more or less whistle blow on taxpayers that are not properly reporting income and/or expenses.  It has been said that disgruntled or former spouses or employees make up a large number of the third parties that report taxpayers for not properly reporting their income or expenses.  

Regardless of the reason the IRS may have chosen your applicable tax return for audit, once you are under audit the IRS is going to scrutinize the items on your tax returns and if certain positions you have taken are not correct or you have overstated or cannot substantiate expenses, the IRS is likely to propose an additional assessment of tax.  

Being Audited? Speak With a Tax Attorney To Understand Your Rights

If you have received an audit notice from the IRS, you may want to consider contacting a tax attorney to represent you through the audit process.  You can speak with a Columbus tax attorney by contacting The McGuire Law Firm.