IRS Audit Red Flags Not Predictable

Received a telephone call today asking the question that if one has not reported all their rental income in past years as taxable on their tax returns. Then, will this raise a red flag for an audit with the Internal Revenue Service.

I informed the person who called anonymously of course that he should report all the income and expenses that are actual and can be proved in case of an audit. No one thing can be predicted as being something that will trigger a red flag or audit for these things are supposedly random according to the IRS.

Yet, as an ex-IRS Collection Officer and analyzing audit reports of prior clients who have been audited. There are items that taxpayers should be made aware of and keep verification via records of income and expenses.

For example, going with the above question on rental income. In an audit usually, the auditor will question rental expenses such as repairs, maintenance, car & truck expenses, etc. With an audit seeking verification of expenses one should expect verification of income to be part of the audit as well.

Keep in mind that an auditor will seek to verify not only the items that may have triggered the audit. The auditor will also verify any other item reported on the tax return.

Therefore, keep all rental agreements, contracts, bank statements, proof of expenses via receipts, cancelled checks (front & back if copies), property tax records, construction costs and any other items you will or have declared on your tax returns.

Remember, you as a taxpayer are ultimately responsible for your tax return entries. There is no fault on the tax preparer, CPA or other third-party who prepared your tax return. Reliance is no defense. Unless, you can prove fraud.

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