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Individual Audit Flag Issues

The following are likely IRS exam/audit issues according to the Internal Revenue Manual (IRM 4.19.11.2.1.1)

  • Itemized Deductions:
    • Unusually high total deduction.
    • Itemized deductions are not claimed elsewhere on the return when standard deduction has been elected.
    • A taxpayer reporting married filing separate on the return, may not have made the same election for itemized deductions versus the standard deduction as the other spouse.
    • Significant car and truck expenses (e.g. mileage).
  •  Medical Expenses:
    • Overall medical, dental etc., expense in relation to the AGI.
    • Medical expenditures for a capital asset.
  • Tax Deductions:
    • Real estate taxes (often looking for consider changes in address).
  • Interest Expenses:
    • Interest payments to individuals.
    • Closing costs on real estate transactions.
    • Interest as a result of a mortgage greater than the indebtedness limit.
    • Interest payments deducted as personal interest.
  • Charitable Contributions:
    • Large Charitable contributions donations or property or cash made to any charitable organization.
    • Payments that may represent tuition.
    • High ratio of the contribution to the taxpayer's total positive income.
  • Casualty or Theft Loss:
    • No insurance reimbursement.
    • Business assets, valuation methods and statutory limitations.
  • Miscellaneous Deductions:
    • Large, unusual or questionable items that do not correspond to the taxpayer's occupation or income level.
  • Pension and/or Annuity:
    • Premature distribution from a pension/profit sharing plan.
    • Amounts are not reported elsewhere on the return.
    • Distribution not properly claimed as a lump sum distribution.
  • Unreported Income:
    • Relationship between income reported on the return and exemptions and deductions claimed.
    • Sources of income and any omission of income.
    • Information Reporting Program mismatch.
    • Occupations likely to have unreported cash income, for example: waiter, cab driver, porter, beautician, etc.
    • Improper exclusions.
  • Moving Expenses:
    • Truthfulness of move (IRS looks for sale of residence and/or research on new and old address).
    • Not eligible due to employer reimbursement.
  • Alimony Deductions
  • Credits:
    • EITC.
    • Child Tax Credit.
    • Child and Dependent Care Credit.
    • Education Tax Credits - Hope and Lifetime Learning.
    • Premium Tax Credits.
    • Qualified Adoption Credits.

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