How to Attract an Income Tax Audit

Make Too Much Money

I’m sorry to be the one to tell you but if you're making more than $100,000 a year, you’re at risk of attracting attention from the IRS and the probability is that your chance of an audit has increased dramatically. Putting it simply, it's even more important than ever to keep adequate records. You will need to substantiate all of your deductions.

It is interesting that the IRS has decided to focus its very limited resources on auditing the tax returns of honest citizens just because they make more than $100,000 annually. 

If the situation is warranted, it may be appropriate for a married couple to file separately, so this is something to consider. Even if it’s a close call, or it might cost you a little more, filing separately insulates both spouses and his/her assets from claims against the other return. As an added benefit, it also lowers each filer's income. This could put both below the $100,000 target the IRS looks for.

Use the Kiddie-Tax

Putting your investments in your child's name will make the income generated from that investment taxable to the child instead of the higher tax bracket parents. You better be aware of the "kiddie-tax" rules on investments. Generally, the first $750 in investment income for a child under age 14 is untaxed. That’s the best part. The next $750 is taxed at the child's rate. Now for the bad part, anything over $1,500 is taxed at the parents' marginal tax rate. Utilizing the kiddie-tax may offer a little savings but it might buy you an audit too.

Hide Your Money in Foreign Lands

The IRS announced that as part of its new audit priorities, offshore credit-card users are the new Number 1 on its hit list. In case you're not familiar with an offshore account, this is how it works. You start by opening a bank account overseas with unreported income that you have acquired.  You then attach that account to a credit card you carry with the foreign bank. Now you use that credit card for easy access to your offshore funds. Offshore accounts are opened in a haven country that allows such income to be hidden.

Those were in the old days, but it's not that simple anymore.

The IRS is on to the scam. The IRS has issued a summons to some of the biggest accepters of credit cards. They have summoned records from America Online, The Gap, Mary Kay Inc., Southwest Airlines, BellSouth, AT&T, Old Navy, Hertz, Avis and even Microsoft. The IRS hopes to learn where you bought big ticket items with a foreign credit card.

Their goal is simple and straightforward, to identify the people who may be using these offshore cards to avoid paying their taxes. Think twice before using this strategy. Remember, credit cards leave a trail better then bread crumbs.

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