IRS Red Flag Outliers Trigger Audits

Count on it. IRS red flag outliers trigger audits  This new wave of IRS red flags, or “outliers” is the buzzword for  items outside the norms of the national average that catch the eye of the IRS.

What are some IRS red flag outliers?

For some examples, take a look at this short list. According to the most recent numbers, people with an adjusted gross income of between $50,000 and $100,000 deducted on average these amounts for these common expenses. Anything above these numbers is an outlier:

• $9,614 – Medical Expenses
• $7,553 – Interest
• $6679 – Taxes
• $3,147 – Charitable Contributions

The IRS red flag list still includes familiar targets, but the Tax Cuts and Jobs Act of 2017 is the wind that now flies those flags with attention-getting gusto and marks them as possible outliers.

The IRS is operating under budget limitations and pressure from Congress to be less zealous in enforcement. As reported in April by The Washington Times, the IRS is auditing fewer tax returns than at any other time in the past 15 years. In 2017, the IRS audited just 1 in 160 individual tax returns, but they’re not just randomly making selections. Their algorithms are set to catch the right ones.

The IRS wants a good Return on Investment!

Just like any prudent business owner, the IRS only wants to spend resources on activities that bring them the highest ROI. Generally, returns are selected based solely on a statistical formula comparing a tax return against “norms” for similar returns. An otherwise normal return could be selected based on an involvement with issues or transactions with other taxpayers, possibly business partners or investors, whose returns were selected for audit. Selected returns are then reviewed by an auditor, and if anything comes up questionable the return is forwarded for assignment to an examining group.

Check out these flapping IRS red flag outliers:

• Claiming a lot less money than last year. The IRS pays attention. Actually, they track historic data and a noticeable change in this number could catch their eye. With the increasing number of people who are making their side gig their main gig and setting up new tax entities, the IRS might see a lowering in personal income as a flag to business tax errors. We provide continuing proactive tax planning for businesses and individuals.
• You make lots of money. For 2015, filers making less than $200,000 made up a group in which only one out of 132 were audited. Over $200,000 upped the number to one out of every 38 returns. Over a million? One out of ten. New tax laws or old standard tax laws, the more money involved, the more chance for error. A saving grace for this group is tax returns prepared by a CPA tax specialist! The IRS doesn’t expect to find an easy or profitable ROI in work done by this type professional. We are the CPA tax specialist for a lot of individuals. Businesses need proactive tax planning, and so do people.
• Taking an alimony deduction. The laws dramatically changed with the Tax Cuts and Jobs Act of 2017 on how and by whom these deductions can be claimed. The IRS targets confusion. Add a mismatch in numbers by ex-spouses, and the IRS sees a profitable audit. This area may be the spotlighted by the IRS. It’s a race for attorneys and their clients to get divorce settlement contracts signed before December 31, 2018. We know how to handle the taxes.
• Very charitable deductions. The IRS knows the average for your area and income level. If you claim non-cash donations and fail to include Form 8283, they tend to notice. Part of the IRS’s ‘work smarter’ plan helped them figure out that anything a tax filer doesn’t have to substantiate when filing is more likely to be fudged. Additionally, the popular crowdfunding and donation collections via the popular ‘birthday-for-a-cause’ trend is opening a lucrative door for the IRS. A lot of unexpected IRS Form 1099s are going to be passed around this tax year that could upset more than a few apple carts. When you have a proactive tax planning relationship with us, you’re in control, not surprised.
• Filing an estate tax return. There aren’t many of these filed; only 35,619 in 2016 with approximately 7.8% receiving extra attention by the IRS. More than 16% of estate returns with assets between $5 and $10 million were examined. One out of three returns with assets exceeding $10 million were audited. These are returns you don’t want to tackle without your CPA tax specialist. If you’ve never been responsible for an estate tax return, chances are very good you’ll send up several IRS red flag outliers. And yes, we prepare these.
• Taking an early payout from an IRA or 401(k) account. The IRS is paying special attention to payouts before age 59½. In a recent poll of 1600 full-time working adults, 42% provide financial support to adult children. More than half are willing to sacrifice their own financial security to do so. Unless an exception applies, these payouts are subject to a 10% penalty on top of the regular income tax. An IRS sampling found that nearly 40% of individuals scrutinized made errors on their returns relative to retirement payouts. Most mistakes came from taxpayers who didn’t qualify for an exception to the 10% additional tax on early distributions. According to a recent Kiplinger report, almost 40% of taxpayers failed to report distributions when they didn’t quality for the exceptions.  This are serious IRS red flag outliers the IRS targets and, in addition, it’s easy for them to see the flags since they are notified of the withdrawal. We are your CPA tax specialist and we know how tax laws affect investments and retirement plans.

What’s the bottom line on you and IRS red flag outliers?

This is not the year to go it alone on your taxes or to make it your next DIY project. Big box store tax cubes, pop-up shops, or accounting offices which also “do” taxes aren’t your answer. You need your own CPA tax specialist. We know how to spot your potential IRS red flag outliers!

Our goal is to become part of your overall life and business goal planning team so that you’ll be able to establish your own goals and know that you have a trusted professional on your team. We establish and maintain a personal and business relationship with our clients. Your LIFE is your business and your BUSINESS is your life. We’re here for YOU.

Call us at 479-668-0082. Use my Calendly Page (it’s easy) to set an appointment or email us.

You may also be interested in:

Alimony Deductions and Who Takes Them?

Why Should the Executor of the Estate Use A CPA Tax Specialist?

What the IRS Says About IRS Red Flags Outliers and Audits