As much as possible, people want to avoid arousing the attention of the IRS because of how it can lead to some expensive consequences. What does the IRS look for when it comes to red flags? Several things exist that will send their red flags shooting straight up and cause people to have trouble. Here is a look at some of the things that might cause suspicion.
Biggest Risk: A lot of Money
Perhaps the greatest risk that exists to people comes from when they make a lot of money. When they do this, the IRS will have an increasing likelihood that they will audit the individual. Most people will never face an audit, but they have other things that they could be penalized for, such as income-reporting discrepancy or proposed additional tax due. Someone who makes anywhere from $1 million to $5 million will have an increased likelihood that they will receive an audit from the IRS. The rate jumps from the previous 0.45 percent up to 2.21 percent when they make between $1 million to $5 million. In addition, if someone makes more than $10 million, the rate for auditing increases to 6.66 percent.
The other thing that raises the trigger with the IRS comes from unreported income. One thing that consistently sparks attention from the IRS is a discrepancy between reported income and the information that the IRS has on the person. The information from a W-2 or a 1099-MISC will go to the IRS from the employer. This means that they can still spot income that wasn’t reported, and if they see a huge discrepancy, they will often call the person on it. For people who do this, it will generate an automatic discrepancy letter, and while it can be difficult for the IRS to track everything in some cases, they can still manage to track a lot of the information.
It’s important to note that tax payers should also be careful not to abuse the tax credit system because of how the IRS scrutinizes these claims more closely, and they will have a much higher likelihood to call these things into question over one that didn’t take the tax credits.
David A. Noyes and Co. is a DBA of Sanctuary Securities, Inc., Investment products and services are offered through Sanctuary Securities, Inc., Member FINRA and SIPC.