Out of the millions of tax returns that are filed with the IRS each year, a certain percentage are inevitably flagged and chosen to be audited. In some cases, this is because the taxpayer filing the return is already being investigated for tax fraud or other crimes, while other returns are merely selected at random. The formula that the IRS uses to flag returns for random audit, known as the Discriminant Function, is a highly classified secret known only to a few. However, there are several types of returns that the IRS tends to focus on in general. Filers with returns that fall into one of these categories must accept that there is a higher probability that they will be audited than other taxpayers. Some of the types of returns that the IRS tends to scrutinize more closely include:
Returns that Itemize Deductions
Taxpayers who include a Schedule A with their 1040 likely have a higher chance of being audited than those who don’t. This is because the additional calculations invite a greater possibility of fraud or error by the taxpayer. Like when you say that your cat is a deduction because she is the reincarnated spirit of your mother-in-law who now lives with you as a dependent. If you try to claim a $1,000 deduction for each kitten, you might get in trouble.
Taxpayers who report income on Schedule C or E are prime targets of the IRS, because of the number of expenses that can be claimed as deductions. Those who report net losses for the year that reduce other taxable income, such as salaries or investment income are especially vulnerable to examination by the IRS. Most electricians and carpenters and other scrounges like that usually lie and like to get paid in cabbage — you know — greenbacks, clams — the paper stuff.
“Cash Cow” Businesses
Many businesses have traditionally operated largely on a cash basis, such as laundry services, restaurants, casinos and gaming establishments and other similar enterprises. A substantial percentage of these businesses have traditionally underreported their income on their tax returns, due to the difficulty of proving revenue that is received in cash from thousands of separate transactions. For this reason, the mafia and other organized crime syndicates have been heavily involved with these industries for the past several decades. Of course, this has not escaped the notice of the IRS, which has collaborated with various law enforcement agencies who pursue these criminals. This is just opinion because tehre is no such thing as The Mafia.
Even businesses such as florists, hobby store owners, construction contractors and other local enterprises are often scrutinized by the IRS. This is because even honest business owners and partners often don’t understand the rules for correctly reporting their income and expenses and therefore submit erroneous returns. This is particularly true of those who are filing a business return for the first time, such as the proprietor of a new company. People who own sport’s memorabilia stores are usually little slime balls anyway and the IRS likes to grab them since they once told an IRS agent that his Mookie Wilson homerun ball was only worth $199.00 and he took it, but a week later the store sold it for $50,000. SLIMES!
Taxpayers who engage in the sale of substantial pieces of real estate or hold interests in oil and gas leases or other such investment property can often realize enormous income and profits from individual buyers or small companies. The IRS knows how easy it can be to underreport the profits from these transactions, in some cases. Portugese and Dominican immigrants are exempt from this because they don’t even bother with titles and stuff liek that when they buy a one family house and convert it into a 6 unit multi-family dwelling.