Taxation & Estate Planning

?Understanding Reasonable Cause for IRS Audits

By Darrin Mish

No one enjoys being the subject of an IRS audit. In order to keep on the right side of the IRS, it is important to know how to avoid being subjected to such an audit. So how do you determine what is deemed as a reasonable cause for an IRS audit? The fact is that there are certain things that will cause a red flag more times than not. One too many red flags and you are in hot soup. Here are just a few things that usually constitute reasonable cause for IRS audits.

In most cases, red flags are caused by deductions on your tax returns. Depending on what type of job you hold, you may make any number of tax deductions. It is inaccurate to say that most deductions cause a red flag; only a few do and the key is finding out what those deductions are and how to avoid problems that come by making them. Arguably the most common deduction is for donations to charities or political parties. These are legitimate deductions, subject to their amount relative to your total earnings. If your donations seem oddly out of line with your income, it will certainly raise doubts about its legitimacy. The logic here is that most people don't donate large amounts of money that are disproportionate to the amount of money they earn themselves.

Ex-IRS agents have revealed that one major reason for getting flagged is making deductions for a large number of dependent children. Although anyone can have a large family, these days it is a rarity. You would be better off not lying about the number of dependants you have just to make some extra deductions.

Another way you may create reasonable cause for IRS audits is by deducting things that don't actually apply to the business you are in. It is quite normal for small scale entrepreneurs to make deductions that are in the grey area, neither absolutely legitimate nor totally disallowed. But the key is not to overdo it. We all want to pay the least amount of taxes possible, but because there are so many things that can present reasonable cause for IRS audits, it is wise not to go to the extreme in your deductions.

Finally, if you have been issued with an audit, deal with it. You will stand a better chance of resolving the issue if you do not make any excuses to try to avoid it.

?Understanding Reasonable Cause for IRS Audits is a post from: IRS Tax Problem Solver Blog - IRS Help

Full post as published by IRS Problem Solver Blog on February 09, 2010 (boomark / email).