IRS selects returns for audit based on numerous criteria.  Here are some common ways your return can be selected for an audit:

  1. You fail to report income that reported on a W2 or 1099 (this can be from a sale of real estate, 1099-S; non-employee compensation as an IC; 1099-MISC now a 1099-NEC (non-employee comp); or withdrawing proceeds from a retirement account, 1099-R)
  2. You fail to report all of the income received by your business.  For instance, if your company receives credit card payments, your merchant provider will send you a 1099-K every year.  The 1099-K will summarize the gross proceeds you received each month and the total for the year.  If the gross proceeds you report on your return is less than the 1099-K income, this may indicate you are underreporting your income.  There are many legitimate explanations for why your gross income is less than the amount on your 1099-K.  But how you report and explain the difference in your tax return can make a difference between being selected and not being selected for an audit.
  3. You amend your income tax return to claim a refund.
  4. If you have a business, reporting a loss for more than 1 year can trigger an audit especially if the loss will offset other income reported on your tax return.
  5. Having a business that is really a hobby such as placing a yacht or aircraft in a business entity and reporting a loss.  The question here is whether this is a business or a hobby.  A business will have an intent to make a profit and you will be expected to establish you are attempting to get clients and have necessary and ordinary business expenses.

Other ways: IRS has an algorithm and assigns a score to your return.  Based on that score, IRS may select your return for examination and send your file to an IRS office in your local city.

If you receive a letter from IRS confirming your return has been selected for examination, contact a qualified tax attorney to review your return and identify the items that will likely be investigated so you can be prepared before communicating with IRS.  Having a game plan is critical.  You want to be honest but prepared when speaking with IRS.

John D. Milikowsky

Founder of Milikowsky Tax Law

We keep businesses in business.

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