Waving the Red Flag - Common IRS Audit Triggers

It’s that time of year again. Time to gather up all the W-2s, 1099 interest and dividend statements, K-1s from pass-through entities, charitable donations, etc.  Yes, it’s tax season once again.  Whether you are filing business or personal tax returns for the 2017 season it may be a good time to remind you that the IRS is watching, not literally, but it will be paying attention.  There are a number of items in a tax return that have been known to raise the interest of the IRS.  Following are some of the common IRS audit triggers to note:

·       Computer matching (W-2, 1099, 1098, K-1, etc.).  The IRS is matching items you report, or do not report, such as wages, interest, dividends, capital gains and mortgage interest that are reported to it via one of the forms listed above.  These types of omissions from a return most likely will trigger a correspondence audit, meaning you will receive a notice from the IRS showing the discrepancy reported on your tax return from the information it has on file.    

·       DIF Scores (Discriminant Inventory Function System).  Fancy term for a numeric score assigned to each individual return after it has been processed.  High DIF = more likely for audit.  The DIF formulas are not public knowledge.  However, unusually high or disproportionate expenses play a role.  For example, high Schedule A itemized deductions (mortgage interest, charitable donations) compared to taxable income or, if you are self-employed, high Schedule C deductions compared to income.

·       Related Audits.  The IRS may audit a return based on an audit of an unrelated entity tax return .  For example, a business which paid individuals for services that did not issue Form 1099s for those services.  If this is discovered under audit of that business then it is likely the IRS could then audit the returns of the individuals that were not provided the forms.

·       Unmatched alimony.  If a taxpayer deducts $50,000 of alimony, the ex-spouse should be reporting $50,000 of income.  Unmatched amounts will almost always trigger a correspondence audit as the social security number of the ex-spouse is reported by the individual taking the alimony deduction. 

·       High mortgage interest deduction on Schedule A.  A taxpayer can deduct mortgage interest on $1.1 million of qualified home indebtedness.  The amount of mortgage interest deduction over and above a percentage of this debt limit (especially in our current low interest environment) could cause IRS to review your return. 

These are a few of the IRS audit triggers and should be considered when filing your tax returns.  Although you certainly should take all the deductions that you are entitled to no one is looking to get the unwanted attention of the IRS.