Month: July 2010

Avoiding IRS Audit Red Flags – How Does the IRS Select Returns For Audit?

IRS audit red flags
How does the IRS select returns for audit?

How Does The IRS Select Tax Returns For Audit?

What types of audit red flags does the IRS use to select returns for audit?  Under its “National Research Program” the IRS first comes up with a “baseline”, or theoretically acceptable, return for different types of taxpayer profiles.  The IRS uses special software to select returns that vary significantly from this profile.  This “DIFF” (Discriminate Function System) software assigns each return a “DIFF Score”.

The Service changes its algorithm from time to time.  While the IRS does not release the particulars of this process, it is common for taxpayers to learn what are the common “red flags” based on the types of audits people start seeing in the field.

From there an IRS auditor conducts an initial assessment of the computer-selected returns. The auditor determines whether to accept the return as-is or to select the return for audit.  If the IRS selects your return for audit you will receive a notice to this effect.

Can you avoid IRS audit red flags?  Yes and no.  Keeping your tax reporting consistent year over year will help.  We believe that large increases or decreases in income may affect your DIFF score.  Now, this hardly means you did anything “wrong”.  It simply identifies your return as one which may merit more attention.  Income that attracts attention is better than less that goes unnoticed.  Your industry also may affect whether the IRS selects your return for audit.  At present, real estate professionals (adding insult to injury perhaps) are being targeted for audit by the IRS.

You can get IRS tax help.  An important thing to remember is you have the right to be represented if your return is selected for audit, and you should.  There are both strategic and practical nuances to the audit process.  There is, as they say, a time and season for different approaches.  Sometimes cooperation is in order, sometimes it’s necessary to fight back.  A lot depends on the issue and the auditor.

Contact me for an overview of the tax audit process and what you might expect if your return is selected for audit.

NBAA’s Handy State Tax Guide

The National Business Avaition Association publishes a very handy “quick reference” tool to state laws concerning aircraft sales and use tax, aircraft registration, fuel tax and related tax issues. This service is free to NBAA members with usernames and passwords to This service resembles, though certainly doesn’t replace, a similar compilation available through publisher Conklin & DeDecker.

Whatever resource you use, however, must be current as to recent tax law changes. Florida only recently, for example, created new provisions governing sales and use tax applied to aircraft returned here within 180 days of purchase. Contact a qualified aircraft tax advisor for details and the most recent updates. Also visit our website, at

Substantiating Aircraft Business Use

On audit an examiner will consider the degree to which you have documented your business use. This will include not only your flight logs but receipts, meeting records, and other evidence of the business purpose for the plane. Duration also plays a part, especially for “mixed purpose” trips to pleasant destinations. The “predominant” purpose for a trip must be for business, that is, at least the majority of the majority of the days must have been spent on business activities, documented as such. For example, your trip to Telluride might have both business and personal pleasure aspects (it should). Just be sure that you can articulate the business aspects of this trip.

Additional eAPIS Reporting Requirements – Department of Homeland Security

The Department of Homeland Security has published a Notice of Proposed Rulemaking (NPRM) which will require more detailed information about arriving and departing private aircraft and persons onboard within a timeframe necessary to assess the risks that certain flights may pose to national security.

The proposed rule expands existing regulations requiring pilots of private aircraft to provide electronic manifest data for all persons traveling onboard to the United States Government one hour prior to departure to and from the United States by filing manifest data via CBP’s eAPIS system or an approved alternate system.

The proposed rule would require operators of private aircraft to provide the following information no less than 60 minutes prior to departure from or to a foreign port or place:

(1) advance notice of arrival,
(2) complete passenger and crew manifest data and
(3) aircraft information to foster aircraft identification, tracking and communication.