The recent hiring of additional IRS agents has many defense attorneys concerned. Currently, with the Republican takeover of the House of Representatives in 2023 uncertain, it is unclear how this could affect the rate at which the IRS is able to add the desired personnel.
However, government estimates suggest there will be more than 87,000 new agents to go after what they deem “tax cheats”. This article will discuss the potential red flags that these new agents may look for when flagging returns for audits.
Dangers of Underreporting Income
The primary danger of underreporting income on tax returns is that it can result in an undue audit and the potential assessment of penalties if the discrepancy is large enough. Additionally, a criminal investigation could ensue if the IRS suspects fraud or tax evasion. As such, it is important that taxpayers accurately report all sources of income, regardless of whether it was earned domestically or abroad.
How Can The Government Tell?
The IRS employs sophisticated data analysis techniques to identify discrepancies between taxpayer information and actual reported income from third-party sources. For example, if a taxpayer reports significantly less income than their usual filings or fails to provide knowledge about any foreign financial accounts they may have, that could lead to closer scrutiny from the IRS auditors. Similarly, one-time payments such as bonuses should also be reflected accurately on all forms for accurate taxation purposes.
Are There Penalties for Underreporting Income?
Taxpayers should always strive to accurately report all sources of income on their tax returns in order to avoid possible penalties associated with underreporting income. Depending on the degree of inaccuracy found during an audit, various monetary penalties can be assessed, ranging from accuracy-related penalties to civil fraud penalties which can be substantial amounts up to 75% of the total due amount as determined by law.
Omitting Information on Returns
Omitting information on a tax return is an intentional act of non-disclosure and can result in serious penalties from the IRS. Omissions can be especially problematic if the omitted information would result in a higher tax liability or penalty assessment. As such, it is important for taxpayers to accurately report all required information on their returns.
How Does The Government Catch It?
The IRS utilizes sophisticated data analysis software to compare taxpayer information with third-party income sources, as well as prior tax return filings and other publicly available records. If any discrepancies are found between what was originally reported and what should have been reported, the IRS can assess fines or even take criminal action against the taxpayer.
What Will You Have To Prove In Order To Avoid Punishment?
In order to avoid punishment for omissions on a tax return, a taxpayer must prove that there were valid reasons why certain pieces of information that were not reported.
This could include providing documentation to demonstrate that no income was received from foreign accounts during the taxable year, or that funds used for deductions were for legitimate business expenses rather than personal use.
Additionally, if there is ambiguity about which deduction applies to a particular expense then this should also be explained in detail in order to receive proper consideration from the auditors.
Dangers of Claiming Large Deductions or Credits
Claiming large deductions or credits on tax returns can lead to increased scrutiny from IRS agents, as well as the potential for fines and penalties if the taxpayer is unable to prove that the deduction or credit was valid. Taxpayers should ensure that the deductions claimed are accurate and that they have adequate documentation to support them.
What Are Some of the Most Common Offenders?
The most common offenders when it comes to claiming large deductions or credits are those who take excessive business losses, either through misclassification of income or simply exaggerating expenses.
Additionally, taxpayers may attempt to claim unreimbursed employee expenses such as travel costs, meals while away from home, or office supplies. Charitable donations are another area where many taxpayers incorrectly report their contributions in order to get a larger refund than deserved.
Be Mindful of the Increased Scrutiny
With the upcoming influx of new IRS auditor personnel preparing for tax season in 2023, defense attorneys need to understand what potential red flags may raise alarms for those responsible for pursuing “tax cheats”.
All taxpayers should strive towards accurate reporting of all pertinent information on their tax returns and ensure proper documentation is provided in order to avoid unnecessary investigations by the IRS. But if you do get flagged, it’s important to have an experienced tax law attorney on your side.
For decades, John Teakell has been on both sides of a number of these types of cases. He has the knowledge and the experience to guide you through any charges you may face. Contact him today if there is a pressing tax matter with the IRS.