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Who is at the highest risk of an IRS audit?

On Behalf of | Mar 7, 2017 | Internal Revenue Service

We know that as budget cuts take their toll, the IRS will be working to squeeze more from each audit. Even as the overall number of audits decreases, wealthy families, successful business owners and those with complicated returns will face increasing scrutiny.

What are some of the clues that a return may raise red flags and draw an audit? Each year, the agency has different priorities. In this post, we discuss several of the 2017 themes.

Computer-generated notices

The agency will likely become more dependent on computer algorithms to spot issues and send automated notices. If you made significant charitable contributions in 2016, you should have proof of the value of these gifts and be ready to provide it if/when asked.

Other issues that may trigger a request for more information include:

  • Large business losses – the IRS frequently targets what is considers “hobby losses” (for example, writing a travel book and expensing travel costs or racing cars)
  • Mortgage interest deductions
  • 529 savings plans

With any notices you receive in the mail, you need to promptly respond. Seeking counsel and a review from a tax attorney prior to sending a response can often avoid further action. If you have solid evidence that substantiates a deduction, it’s possible to end the audit at this early stage.

A new “Wealth Squad”

Specialized agents have been trained to comb through the finances of extremely wealthy families. This goes beyond the 1040 to include reviews of companies and/or investments. The IRS has partnered with other federal agencies to force disclosure of American investments abroad. It’s getting easier for the agency to follow money and ensure proper US taxes are being paid.

Some of the upcoming campaigns will be narrow in scope with trained experts looking at energy tax credits or accounting practices in certain industries. “Basket options” structured to reduce tax bills will probably be scrutinized more closely. A recent raid on the corporate offices at Caterpillar shows that “transfer pricing” may also be another agency priority. 

As the year unfolds and stories come out about certain targets, we will continue to keep you informed.


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