Income
Tax 411
Your IRS Audit Risk
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Your IRS
Audit Risk
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A few years ago, the IRS came under fire
for lowering the number of audits they were performing. Audits of wealthy individuals
were
down to only half the level of 1992. Total corporate audits were decreasing as well and the
total number of experienced auditors was down significantly from prior years.
Does this mean you can relax? Well....perhaps. The number of audits can
and will increase quickly again if Congress begins to notice a significant drop in revenue
projections as a result of suspected tax evasion.
One contributing factor in the audit
decline that many critics tend to overlook is the tax simplification measures taken a few
years ago. Whether the Code was actually simplified is open to debate, but many of the
loopholes and tax shelters that proliferated in the 1980's were indeed eliminated. |
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The IRS has also changed its auditing strategy to some extent. As we
reported a few months ago, the "random" audit has been eliminated and instead,
the agency looks for "red flags" in your return. A red flag can be anything that
is above or below industry norms. For example, reporting travel and entertainment expenses
which are 25% of your total revenue may get your return pulled for an audit if the
"norm" in your industry is 5% of revenue.
Another strategic change is how the IRS selects businesses for
audit. The agency now conducts detailed studies to determine which industries (and
what areas of those industries) it will select for audit. That does not necessarily mean
your business will get selected for an audit if it is in one of the targeted industries,
but it probably will increase your chances of being selected - especially if you have a
"red flag" on your return.
The industries currently being targeted by the IRS are as
follows:
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air charters
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Alaskan commercial fishing
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architects
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artists and art galleries
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attorneys
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auto body and repair
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bail bond
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bars and restaurants
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beauty and barber shops
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bed and breakfasts
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car washes
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cattle auction barns
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commercial banking
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commercial printing
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computers, electronics, and high technology industry
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drywallers
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entertainment
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farming
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foreign athletes and entertainers
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furniture manufacturing
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garment contractors
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garment manufacturers
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gas retailers
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grain farmers
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hardwood timber
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independent used car dealers
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masonry and concrete
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ministers
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mobile food vendors
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mortuaries
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music industry
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oil and gas
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pizza restaurants
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retail liquor industry
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taxicabs
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tobacco industry
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tour buses
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trucking
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wine industry
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