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Frequently Asked Questions


The IRS announces each year what they are going to be looking for in their annual “Dirty Dozen” report.  They also make the audit statistics available in order to see t5hat they are auditing taxpayer’s returns.

The following are the top five red flags for audits.  They include:

  1. Location.  Where you live makes a difference in determining whether you are more likely to get an audit.  You are more likely to get an audit if you live in one of these places:
  • Los Angeles
  • North Central District (ND, SD, MN)
  • Southern California
  • Northern California
  • Manhattan
  • Central California
  • Brooklyn
  • Southwest (AZ, NV, NM)
  • South Florida
  • Houston
  1. How Much You Make.  This statistic is fascinating.  It would seem to make sense that the IRS is more likely to audit people who make more money. But, the fact is that they are actually more likely to audit people who make LESS money.  In fact, the most likely return to be audited as a return that includes a business that makes less than $25,000 per year.  If you do not have a business, you have the most chance for an audit if you file a Form 1040A and make less than $25,000 per year.
  2. Business Entities.  If you have a business, you are much more likely to be audited if you operate in a Sole Proprietorship, Schedule C.  In fact, you are ten times more likely to be audited as a Sole Proprietorship than if you are an S Corporation or C Corporation.  Why?  That is because most Sole Proprietorships do not have great record keeping systems and the IRS knows that.
  3. Under-reporting Income.  The IRS receives copies of your K-1’s form Limited Partnerships and S Corporation, 1099’s from interest, dividends and sales, and W-2’s.  If you do not report these items on your return, or you report a different amount, your return will get pulled for inquiry.
  4. Who Files Your Return Matters.  If you have a complex return and prepared it yourself or if your return was prepared by someone on the IRS’s problem preparer list, you are more likely to be audited.

Q. Watching what has happened to so many people over the years, we’re really concerned about teaching our children about saving and investing.  Can you provide us with some tips?

A. You are right about the importance of teaching our children about money basics, which is best begun when children are young and developing financial habits that will shape their futures.  Teenagers, especially, need to learn how to manage their money before it starts to manage them.  Learning about how to handle money is a s important as earning it.

Some Ideas:  Talk with your local Board of Education regarding the need for basic financial literacy for young people graduating from high school.  Some school districts have been very progressive and teach basic financial skills during junior and senior years.

Next, buy a few basic books about investing and money.  Leave them about the house, suggest that your children review the table of contents and read any chapter that might interest them.  Offer to discuss concepts with them.

Spend some time on the internet with your children looking at different sites that might be of interest.  A search engine can assist you in finding age-and knowledge-level appropriate sites.

Q. Generally speaking, the statute of limitations is three years for IRS Audits.  Are there any exceptions?

A. Yes.  U.S. Tax Law allows the IRS to extend the assessment period to six years if they think the amount of unreported gross income is greater than 25 percent of the amount reported on a return.

There is no limitation for fraud.

Q. Is the reduction of the phase-out for personal exemptions and itemized deductions the same in 2007 as it was in 2006?

A. Yes, the exemption reduction for 2007 is limited to 2/3 of the full reduction amount (a 1/3 reduction of the reduction), the same as in 2006.  The itemized deduction reduction is also limited to 2/3 in each year. 

For 2008 and 2009, however, the maximum reduction for both exemptions and itemized deductions decreases to 1/3 of the full reduction amount.

ITEM                                               $2006 AMOUNT 2007 AMOUNT
Personal Exemption                                $3,300 $2,400
Filing Status AGI phase out range
MFJ, QW $225,750--$348,250
HOH $188,150--$310,650
SINGLE $150.500--$273,000
MFS $112,875--$174,125
Filing Status AGI phase out range
MFJ, QW $234,600--$357,100
HOH $195,500--$318,000
SINGLE $156,400--$278,900
MFS $117,300--$178,550
Filing Status Phase-out Begins at AGI of Filing Status Phase-out Begins at AGI of
$ 75,250
$  78,200
Filing Status   Standard Deduction Age 65 or over or Blind (each) add Filing Status Standard Deduction Age 65 or over or Blind (each) add
$ 7,550
$ 5,150
$ 5,150
$ 7,850
$ 5,350
$ 5,350
Dependent Children:  Greater of $850 or earned income, plus (not to exceed $5,150 – blind dependent add $1,250). Dependent Children:  Greater of $850 or earned income, plus $300 (not to exceed $5,350 – blind dependent add $1,350).

We will accept questions from readers and reprint selected answers on this website.  We will answer as many as we can.

Diane Polangin
Total Tax Service

3006 Savoy Ln
Bowie, MD 20716

Email: DPolangin@verizon.net