Have you ever wondered who the IRS targets for audit? It is often not who you would guess. One of the most common strategies the IRS uses to select taxpayers for audit is Computer Scoring. This is where tax returns are compared to statistical norms from the National research program. These can compare your tax return to others in your zip code or industry. I received one of these notices in 2010. I was a single mom, living off savings in a high end zip code in Los Angeles. My earnings as reported were lower than my neighbors and the IRS wanted to know why.
Document matching – this is where the income reported on your tax return does not match documents the IRS has received from employers or banks or financial institutions. So if your interest or dividends as declared don’t match what the investment company reported, you will likely get a notice. If your 1099 income earned does not match 1099s the IRS received for you. So do be careful with your documents and make sure that your tax return information matches the documents you have received. Most often these are just clerical issues and are easily fixed, even with some additional taxes, interest and penalties attached.
For business owners, Worker Reclassification is a big one and getting bigger.The IRS does employment audits to determine whether workers classified as independent contractors should actually be employees. This can be an expensive and nasty audit.
I recommend keeping good records, always and then you have no reason to be concerned. Should an IRS notice arrive, respond timely with the documents requested.
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