Common Tax Issues that Lead to IRS Audits (New) 2023

(New) Common Issues that Lead to Tax Audits 2023

Common Issues that Lead to Tax Audits 

When it comes to the Internal Revenue Service, many people may go their entire life without ever being audited or receiving any notices from the IRS — other than possibly a refund. Unfortunately, other taxpayers get stuck in the IRS matrix and find themselves on the receiving end of various audits, examinations, fines, and penalties. There is no one specific route that the Internal Revenue Service takes when it wants to audit or examine a taxpayer. But, it is also important for taxpayers to note that simply because they get audited does not mean it will result in them owing any tax liability. In fact, it is not uncommon for a taxpayer to be under audit or examination and receive an NC letter representing ‘No Change.’  While there are literally hundreds of reasons why a taxpayer can be audited, let’s go through five common issues that lead to IRS tax audits.

High-Deductions and Expenses Claimed

If you have a tax return that claims a significant amount of deductions and expenses, this can be a red flag that may lead to an audit. That is not to say that the expenses or deductions are not legitimate, but the Internal Revenue Service wants to confirm that the expenses and deductions are proper. For example, let’s say you launched your own consulting business, and you took expenses for staying at a resort hotel with high-priced meals and events. Were these meals and entertainment activities for you personally or for your business – – or both? This is one-way taxpayers get audited often.

The IRS Believes you Underreported Income

Another situation that can lead to an audit is if the Internal Revenue Service believes you underreported your income. For example, let’s say you are a partner in a business or other investment activity in which other Taxpayers in a similar position recognized significantly more income that was not included on your tax return. This may make the IRS believe that you did not properly report your portion of the income — which can lead to an audit.

You are a High-Income Earner

In general, high-income earners are at a higher risk for an examination. As part of their enforcement initiatives, the IRS is concentrating on the tax gap – including the various tax planning techniques that wealthy, high-income earners utilize that the IRS may not believe is kosher. One common situation is when the Taxpayer does not properly report a reportable, confidential, or listed transaction on their tax return (Form 8886) – and/or takes part in a tax scheme that the IRS does not believe is legitimate, it may lead to an audit.

Foreign Accounts Reported by FATCA

FATCA is the Foreign Account Tax Compliance Act. More than 110 foreign countries and hundreds of thousands of Foreign Financial Institutions (FFIs) voluntarily and actively report US taxpayers to the US Government who maintain foreign accounts and assets at their institutions. In previous years, the IRS was merely sending soft letters to taxpayers to inform them that the taxpayer may have missed some information on the tax return. These days the IRS is taking the next step and noticing taxpayers for audit and examination.

You Did not File FBAR, 3520, 3520-A, 5471 or 8938

Taxpayers have an interest in foreign accounts, assets, and investments, they may have one or several international information reporting form requirements each year. Whether it is because they received a large gift from a foreign person (Form 3520), are an owner or beneficiary of a foreign trust (Form3520-A), or have an ownership interest in a foreign corporation (Form 5471), they may have significant reporting requirements. Especially when other individuals such as joint holders have filed forms that a joint taxpayer did not file – it can lead to an audit or examination.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the pension tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.