Using a Forensic Accountant in Tax Cases (Civil or Criminal)

Why should a taxpayer use the services of a forensic accountant when being audited or under criminal investigation? Tracy Coenen talks about the expertise a forensic accountant can bring to the case, specifically in evaluating the methods used by the IRS for determining income.

Tax Audits and Bad Recordkeeping

You are being audited. These are some of the most dreaded words an individual or business will ever hear from a state or federal tax auditor. They invoke fear, panic, and sometimes anger.

Most of all, they create a need for documentation. Every number could be scrutinized. That means documentation must be produced to support the amount of each expense and the business purpose of the item.

Some of us are meticulous in our documentation, but if you are like most taxpayers, you have pockets of misplaced or destroyed data. Even worse, you may be in a situation where documentation was completely destroyed by a fire or flood. If you don’t have documentation, does that mean your deductions are automatically disallowed? Not necessarily.

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More red flags for the IRS

Scared of being audited by the Internal Revenue Service or your state taxing authority? That’s what they want! They hope the fear of an audit will keep you honest. And although the average taxpayer has a very low chance of getting audited, the potential is always there.

So people are often wondering about some of the most common audit red flags. Well, the IRS is smart. They know that if they told everyone what the red flags are, taxpayers would all avoid those items and cheat elsewhere.

Fortunately, your trusty tax preparers have noticed some of the more common audit issues:

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Tax Audit Red Flags

As tax day nears…. taxpayers around the country are in a panic. Some because they’re not ready for April 15. Others because they’re deathly afraid of being audited. Here are some common audit red flags to ponder.

The IRS purposely doesn’t definitively say what things make you more likely to be audited.
Since our tax system relies on voluntary reporting of income (i.e. you volunteer your tax information to the IRS and tell them how much you owe), the IRS uses the fear of audits to scare people into being honest. But tax preparers can see patterns in the IRS audits, so that’s how we come up with these lists of red flags.

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Can you really avoid an IRS audit? (Or at least reduce your chances?)

Yes and no. Great accountant answer, huh? The truth is that the Internal Revenue Service has some special red flags in place that help flag your tax return for an audit. Those super-secret red flags are revealed to no one. Apparently the IRS system takes your tax return data, runs its super-secret algorithm, and decides if your tax return is a high risk for problems.

So the usual way you get flagged for an audit is due to what you’ve reported on the face of your tax return. Home office deductions have long been dogged as items that increase your chances for an audit, and I tend to believe that’s true. Why would a home office be a red flag? It’s a much-abused deduction, and it can be closely tied to other questionable deductions like those from a multi-level marketing “business.”

Read moreCan you really avoid an IRS audit? (Or at least reduce your chances?)