There was a time when the government was more lenient in deciding who would face tax audits and who would be let off the hook. The IRS Reform and Restructuring Act, which was set in place in 1998, shifted focus from tax collection to taxpayer rights. Sadly, no party lasts forever.
Current IRS Commissioner Doug Shulman announced plans to even out the IRS's focus on law enforcement and taxpayer services. For three groups, especially, that could mean more audits are on the way.
- High-net-worth individuals should expect closer scrutiny into their finances, especially offshore accounts, due to recent, international interest in Swiss banking practices.
- Businesses with international operations should also make sure the books are served raw.
- Finally, large corporations - like General Mills, Target and Apple - should be ready for closer inspection.
Still, there are things that you can do to make yourself a less attractive target for IRS audits.
One of the biggest things to avoid is aggressively pursuing every potential tax break on your 1040 return form. The more you try to get out of, the more interesting your 1040 will be to the IRS. If your deduction amounts don't add up, or appear to be inconsistent with other information you have provided - don't be surprised to receive a letter from the government.
Some of the things the IRS looks for on tax returns are:
- Extensive business expenditure deductions, such as claims for meals and entertainment
- Financial losses from an activity that appears to be more of a hobby, rather than an actually business venture
- Unreported income
- Charitable deductions
Even with this increased scrutiny, you should not be afraid of filing for tax breaks you legitimately deserve. Rather, be aware of the IRS's increased interest in tax returns and proceed with caution.
- Red Flags that Tempt the Tax Auditor (Bankrate.com)