THUMBS DOWN: How Many Red Flags Do You Wave at the IRS?

Physician's Money Digest, January 2007, Volume 14, Issue 1

Investor's Business

Daily

According to , you have a 27% higher chanceof being audited than other taxpayers,if you have taxable income over$100,000—that puts many physiciansat risk, especially if they are selfemployed.Dotting your i's and crossingyour t's the first time around can certainlyhelp avoid a headache down theroad. Not only is there the hassle of diggingup old paperwork, but you usuallypay penalties and interest—potentiallya large chunk of change if a lot of timehas passed. Simple mistakes such assubmitting numbers that don't matchW-2s and Form 1099s can catch theIRS's eye. And a self-employmentSchedule C form alone is a red flag,because it allows the taxpayer theopportunity to write off legit and forgedexpenses that are difficult for the IRS todifferentiate on paper. If you have apractice, be aware that the IRS paysclose attention to what you write off,and always save documentation; theIRS can typically go back 3 years. Manyother factors can trigger an audit, forexample, when your deductions clashwith income. A $2-million home mortgagewith a $100,000 householdincome might raise an eyebrow andwave a big ol'red flag. Other times,spouses on the verge of a divorce tendto report different data and try to takethe same deductions. Paying taxes isdone on the honor system, and it'simportant to know what methods theIRS uses when determining who is notproperly reporting their financial affairs.