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II: SOLE PROPRIETORSHIP AND OTHER RED FLAGS

Taxable Income Range:

The greatest amount of tax filing audits occur for tax forms reporting taxable income in excess of $100,000.00. By reducing one's taxable income to under this level one is statistically reducing one's chance of being audited by approximately 45.23%. If one reports income below $50,000.00, the tax filer is reducing statistical probability of audit by around 16.89%

Incorrect 1099 or other Previously Reported Information:

Employers and financial institutions all report data to the Internal Revenue Service independently. This means the IRS has a means of comparing one set of information with another. For example, form 1099's which are other income earned forms are reported to the IRS separately by financial institutions. Misstating the same information the IRS already knows about can trigger an audit. Other information that may be previously reported to the IRS includes interest on loans, mortgage payments, and property tax. Erroneously reporting these figures is also liable to activate a red flag with the IRS.

Income Tax Deductions:

Another area that is subject to triggering a potential audit is the quantitative amount of deductions made on a tax filing. If the deductions are disproportionately large or numerically inconsistent with the tax filers other financial data, the audit alert may trigger causing an audit inspection. For example, a sole proprietor may over report home office space used for inventory storage. If that proprietor has a home that is 1300 square feet and the expenses reported are for a space of 980 square feet, this may exceed the logical space for a home that can be utilized for storage as most homes require a certain amount of square footage for living space.

U.S. Internal Revenue Service audits are prompted by computer algorithms based on historical financial and tax reporting statistics. Essentially, dishonest tax reporting is recordable in the form of tax filing patterns and/or trends. Some of these patterns and trends are correlated with the red flags illustrated above and may cause an IRS tax audit. Additionally, some tax filing classes such as those within a certain type of business or taxable income range are statistically more likely to be audited than others. This is because these businesses or tax filers are either likely to generate more tax revenue for the IRS and/or have a historical likelihood of erroneously reporting tax data than other tax filing categories.

Sources:

http://bizt axlaw.about.com/od/businessaud its/a/audit_red_flags.htm
http: //sbinformation.about.com/od/t axes/a/avoidsbaudit_ga.htm
http ://www.irs.gov
http://www.wwweb tax.com/audits/audit_avoiding. htm

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