If you’ve read our Top Ten post about avoiding certain red flags, you’re probably aware that some issues are more likely to give rise to an audit than others. Former senior attorney with the Internal Revenue Service Chief Counsel, Laurie Kazenoff, has seen them all.

We took notes. Here are a few:

• You can’t completely avoid being audited
• There are common targets on the IRS radar
• Schedule Cs are a major target

Schedule Cs: Under a Microscope

“The higher your income, the more likely you are to be audited, but the most commonly audited areas are Schedule Cs,” said Kazenoff. “[The reason for this is] because of the opportunity to fudge the numbers by understating income or inflating deductions such as home office or other expenses.”

“If the numbers are outside the norm, the computers will pick it up,” Kazenoff cautioned. “Most fields on a return are compared to averages, and outliers will be targeted. Large losses on both individual and business returns will be flagged. If you’re a going concern and have enormous losses, they want to know how you’re supporting yourself, or how you stay in business. If the numbers fall outside the national average, there’s a good chance of being picked up for an examination.”

Information Missing is a Huge Red Flag 

“Many people don’t realize that the IRS matches every piece of third-party reporting with what taxpayers put on their return,” she said. “This includes interest income, dividend income, independent contractor income as well as W-2 income. The issuer is required to report it both to the taxpayer and the IRS. If the taxpayer fails to report the figures on their return — to the penny — the matching system will flag the return and they will receive a letter from the IRS.”

Not Every Industry is Considered an Equal Risk

“The service issues a list of industries they target, such as the mining industry,” she said. “And there are businesses that have historically underreported income. Businesses where cash changes hands, such as restaurants and laundromats, are examples. But although gas stations deal in cash, they have an independent record-keeping system.”

Are Independent Contractors Frequently Audited?

The IRS also targets independent contractor situations. Kazenoff noted, “Are the workers really employees?”

Worker misclassification is an important issue for the IRS and various state taxing authorities because of the perception that many employers are not properly classifying their workers. By avoiding labeling their workers as employees, employers can avoid paying payroll taxes, minimum wages, overtime, health and retirement benefits, and paid leave.

“A lot of companies try to avoid payroll taxes, workers compensation and unemployment withholding,” she said. “They think they can get off the hook, but it’s an issue the IRS will pursue.” Although there is no bright-line test to judge whether a worker is an employee or an independent contractor, “[The IRS] will look to see if certain factors are present to determine if the worker is really an independent contractor,” she said.

General Guidelines 

• Employee: Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control how the services are performed.
• Independent Contractor: The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.

Filing a Large Claim for a Refund on an Amended Return

Filing a large claim for a refund on an amended return will almost always cause an audit, according to Kazenoff. “They will wonder what you did wrong on the first return,” she said. “It will almost always be picked up.”

“If the original return failed to include an item of income, of course, you will want to correct it on an amended return,” she said. “But filing an amended return that claims credits that you didn’t claim on the first return will open up the whole return to scrutiny, so you end up being audited on other things not originally at issue.”

This is particularly true where the amended return raises new issues, she indicated. “As an example, a return might be amended to claim R&D credits that weren’t on the original return. The IRS is likely to audit for that particular issue, but will open up the entire return for questioning,” she said.

The Bottom Line

The key is to have a certified tax resolution specialist on your side. When it comes to tax resolution, Jeffrey Schneider, EA, CTRS knows how to navigate the IRS maze. He can help you minimize the risk of an audit and the resulting tax problems down the road. Also, he will ensure you have meticulous records and keep you within the guidelines of the IRS.

If you need an expert tax resolution professional, reach out to us and we’ll schedule a no-obligation confidential consultation. Jeffrey Schneider, EA, CTRS will explain your options and help permanently resolve your tax problem.

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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax Problem Solutions as well as an Enrolled Agent, a Certified Tax Resolution Specialist and Advanced Crypto Tax Expert.
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Author of the Now What? Help! series, Jeff defines and deconstructs IRS notices and clarifies letters and actions the IRS will take to get what they want. He interprets the world of the IRS in a fashion that mixes attention to detail with humor to help you better understand and resolve your tax problems.

The books are available in paperback and eBook on Amazon.
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