March 24, 2006 -- According to blackenterprise.com, an increase in enforcement personnel enabled the IRS to double the amount of individual taxpayers subject to having their return examined in 2005.  This trend is expected to continue; therefore, taxpayers should be aware of items that can catch the attention of IRS enforcement personnel and increase the odds of being audited.  The following are potential audit red flags:

• Invalid or incorrect Social Security numbers
• Math errors
• Sloppy, hand-prepared returns
• Incorrect bank deposit numbers or routing numbers
• Failure to sign and date the return
• Failure to attach W-2s
• Illegal tax shelters
• Off shore credit cards

The lack of automatic IRS reporting systems has heightened scrutiny of potential noncompliance issues for sole proprietors.  The Associated Press has reported that the IRS believes that sole proprietors and contractors were responsible for $68 billion in underpaid taxes.  Therefore, it is not surprising when dailybreeze.com reports that sole proprietors are 10 times more likely to be audited than other business entities.

The following issues will continue to be of particular interest to the IRS.   

• Underpayment of quarterly estimated payments, or late payments
• Income-to-deduction ratio that exceeds 52%
• Vague expense categories, such as “miscellaneous expenses”
• Home office deduction (perhaps the number one audit trigger)

For more information, contact your Asher tax professional or Gene Ciociola at 215-564-1900.

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