Will my Tax Return be “Red Flagged” by the IRS?
July 3, 2004
By Jim Harnsberger, Sr. Tax Analyst

SAN DIEGO – One of the most misunderstood aspects of the IRS, and what has become a virtual “urban legend” is the notion that a tax return is somehow “red flagged” for certain deductions, or issues reported on the forms when you file a tax return with the IRS.

The FACTS – Frankly this so-called red flag warning most taxpayers hear from their accountant or tax preparer is simply a reflection of how very little they understand the true nature of the very sophisticated operations conducted at IRS when a tax return is filed. The fact of the matter is no one item or single issue results in anything closely defined as a “red flag”. In short, there is no such thing as a “red flag” at the IRS where a person stands at the assembly line placing little red flags on tax returns because you claim more than $500 in donations of Schedule A, or you claimed a deduction for the business use of a home office.

The FACTS – Tax returns are evaluated, scored, and reviewed by very sophisticated complex formulas, patterns and historical data from past experience of the IRS for the “likelihood” of understating the true tax liability. The IRS knows from its vast experience those returns that are more likely than not to contain such understatement of tax liability, and over the recent years, the computer systems at IRS have actually become very effective in finding these types of returns.

The FACTS – What the IRS computers and personnel do not do however is account for the myriad of errors and omissions (missed deductions or misclassified reporting of events) that very often, according the Government Accounting Office GAO, result in taxpayers overpaying their taxes, in some cases by more than $100,000. In this recent GAO study it was revealed that as much as 40% or more of the tax returns prepared by a CPA or Tax Professional contain errors, omissions, and clear mistakes resulting in taxpayers overpaying their taxes.

The TRUTH – The truth be known the IRS not only does not have an unlimited supply of “red flags”, they care very little about how much or how little a taxpayer receives in refunds, or reduced tax liability. What they do in fact truly care about is how accurate the tax return is, and that it is filed on time using the correct procedures provided in the Internal Revenue Code. Such issues as filing an amended return, claiming more than $500 in donations, claiming a home office, or medical expenses do not by themselves create a so-called “red flag”. It is the total return scored, evaluated and compared to other returns likely to have the same types of patterns that the IRS evaluates. Of course certain issues such as 1099 Independent contractors may draw more attention in this evaluation, but alone, it is not a “red flag” that will cause an audit of the return.

Taxpayers who operate a business or invest in real estate have unique issues that differ greatly than say a taxpayer who works at a local restaurant serving dinner. No one issue creates a “red flag” and no two tax returns are exact. All taxpayers are advised to obtain a second opinion to ensure every issue has been correctly reported.

For more information contact Tax Smart America at (619) 469-5800 for a FREE review of your tax returns to learn if you have any audit issues or overpaid taxes.