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Business Tax Audit Advice From Former IRS Commissioner
Audit
An audit can be both an alarming and bothersome time for a business. Here are some simple and helpful steps from the Commissioner of the IRS to make the process go as smoothly as possible. These suggestions are especially useful to small and medium sized businesses.
How to Maneuver the Audit Process:
1. Gather your Workplace Organization – Upon receiving the notice, immediately meet with your employees, tax professionals/CPA, and other involved groups. Also, thoroughly examine all documents. It is vital to be prepared in a timely and organized fashion for your first meeting. First impressions can be critical.
2. Courtesy to the Agent – Keep in mind IRS agents have a challenging job. If the agent is treated respectfully, they are more apt to be understanding on your matter.
3. From the Offset Establish the Whole Outlook of the Investigation – This is very important. The IRS is very open about business matters. It pays to have no unknowns or surprises during the audit. Everything should be carefully examined.
4. Be Punctual on Timelines – The IRS will want to establish timelines and target dates for reports and materials. Missing a deadline due to setting an improbable timeline could have serious consequences. That being said the IRS has resource limitations and will want to get the audit done on a prompt schedule. Be prepared in knowing this.
5. Record Preparation and Communication – It is very important to have all of your materials organized and labeled. Everyone involved in the process should be thoroughly prepared and well-informed.
6. Execute your Own Review – Be thorough and go beyond what the IRS expects of you. The results can be advantageous. There have been situations where in fact checks have been received from the Treasury.
7. If it is Imperative, Speak to the Manager – If question’s or complications arise just ask to speak to the IRS agent’s manager. The IRS actually encourages business owners to contact the higher up personnel to seek a resolution.
8. Mediation and Arbitration – The IRS has significantly broadened its opportunity for taxpayers to seek a resolution. When it is applicable mediation and arbitration are great channels to consider for solving a problem.
9. Appeals and Litigation – The minute you receive the audit notice, always know that you might have to seek the final outcome through mediation and arbitration, IRS appeals, or even litigation.
If you have a concern in regards to an audit or any other tax question(s), our tax settlement professionals can help you. For more information about our services, visit us today at www.professionaltaxresolution.com. With over 16 years in the business of resolving tax debt, we have a thorough understanding of tax law together with the experience to know which option will be the best fit for your specific set of circumstances.
For more information about our tax resolution services, visit us today at www.professionaltaxresolution.com. Contact us by phone at 877-889-6257 to receive a free, no obligation consultation.
7 Ways to Guarantee an Audit
As the National Debt grows, the IRS has become increasingly vigilant with enforcing taxes. Therefore, returns that could have been accepted in prior years may now be flagged for an audit. Even small mistakes can influence whether or not you are audited.
Here are 7 ways to guarantee an audit:
Your income is suspiciously low or unusually high. Since the IRS knows the average salary in a given field, making less than other people in the same profession raises a red flag. Having a relatively low income while you reside in high income area is also a cause for review. On the high end, while the IRS audits less than 1% of taxpayers each year, those earning $100,000 or more are 500% more likely to be audited.
You fail to report income. You must report all wages, interest, dividends, capital gains, and miscellaneous income. All of your W-2s and 1099s are submitted to the IRS, so they can match your return against these documents and know if something is missing.
Your income has large swings from one year to the next. Since the IRS assumes that your income should be fairly consistently from year to year, large income changes that cannot be verified against your W-2s and 1099s will result in a red flag.
Your itemized deductions are too high. Deductions higher than the “average” can flag your return for an audit. This includes itemization from medical or dental expenses, taxes on real estate or personal property, interest on a home mortgage, gifts, sizable casualty or theft losses, and unreimbursed employee expenses.
Your charitable non-cash gift is valued at over $500. If your donation of valuable personal property $500 and over is not appraised or Form 8283 was not filed for your donation, you could be flagged for an audit. While taxpayers are entitled to a deduction for donations, it is for the fair market value of the donation—NOT the original cost. A general donations value guide is available on Goodwill’s website.
Your charitable contributions are overly generous. While charity is in no way discouraged by the IRS, if you are donating much more than the average person in your tax bracket, your return can be flagged. Make sure to have detailed and accurate receipts for all of your contributions.
You claim employee job expenses. The IRS assumes that if your employer doesn’t reimbursing you for an expense, it may not be a true job expense. Therefore, simply reporting a job expense can flag your return for an audit. If you receive a W-2, your job expenses would need to meet the following: the total of all the expenses exceeds 2% of your adjusted gross income, expenses are “ordinary and necessary,” and were not reimbursed.
If you have received an audit notice from the IRS or want to avoid mistakes on your tax return, our experienced tax settlement professionals can help. Please visit professionaltaxresolution.com for more information on our tax services. You may also call us at (877) 889-6527 or email info@protaxres.com to receive a free, no obligation consultation.
IRS Audit Red Flags – What the IRS is looking for – Tax Tips Part 3
Are you self employed? Do you file a Schedule C? If so, you have a higher likelihood of getting audited. Individuals and small business often make small mistakes that flags their tax return for an audit. Taxes are no place to falsify information but small mistakes and common practices such as rounding numbers can give an IRS agent enough reason to audit your entire return. Of course, doing your taxes the right way from the start is always the best advice. In part three of our three part series on Tax Tips to Avoiding a Costly IRS Audit, here is a list of additional “Red Flags” that can trigger an audit of a tax return. In this segment we focus upon those that are self employed or who own a small business.
Small Business/Self Employed Tax Return Red Flags
Schedule C – Overly Abused: Because there is so much abuse in the Schedule C it may be prudent for taxpayers to incorporate or form an LLC. The mere reporting of businesses operations on Schedule C rather than a separate corporate tax return increases a taxpayer’s chances of being audited 50 times.
Schedule C – Taxpayers who are employed by others (i.e. who receive a W-2 at year end) and who also claim a loss from a Schedule C business operation are likely to find their tax returns audited by the IRS.
Schedule C – Cash businesses: Small business owners, who have cash businesses: taxi drivers, car washes, bars, nail salons, hairdressers, small restaurants are easy targets for IRS auditors.
Schedule C – Large Meal and Entertainment Expenses: Big deductions for meals, travel and entertainment are always a audit red flag. Make sure your business conforms to strict substantiation rules for the expenses: amount, place, persons attending, business purpose and nature of discussion or meeting. Also, receipts are required for expenditures over $75 or any expense for lodging while traveling. Essentially if your meals, entertainment and travel expenses are more than 10 percent of your business’s gross income there needs to be a good reason.
Schedule C – Reporting business losses for more than 2 years consecutively: The IRS has a rule that you cannot deduct losses from a hobby on your tax return. You must be in business with the intent of making a profit. If the IRS deems that your “business” is actually a hobby, they will disallow the deductions.
Schedule C – Loss-generating activity sounds like a hobby:…dog breeding, horse racing, antique seller, classic car reseller. Tax laws don’t allow you to deduct hobby losses on Schedule C; however, you do have to report any income earned from your hobbies.
Schedule C – Claiming 100% business use for an automobile: Make sure you have very detailed mileage logs and precise calendar entries for the purpose of every road trip. if you use the IRS’ standard mileage rate to deduct your business vehicle costs, ensure that you are not also claiming actual expenses for maintenance, insurance and other out-of-pocket costs depreciation.
These and other tax tips are just examples of the type of the proactive, year-round tax guidance we provide to our clients. If you need to file your 2011 or prior year tax returns, or if you have an IRS or State Tax problem, our experienced tax professionals can help. For more information about our tax services, visit us today at www.professionaltaxresolution.com. You may also Contact us by phone at (877) 889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.
IRS Audit Red Flags – What the IRS is looking for – Tax Tips Part 2
The Federal Budget Deficit is a large concern and the IRS has become more vigilant with tax enforcement. The IRS is already paying more attention to returns that might have been passed over for an audit in years past. With more audits occurring, more and more people are concerned about making small mistakes that might flag their tax return for an audit. Taxes are no place to falsify information but small mistakes and common practices such as rounding numbers can give an IRS agent enough reason to audit your entire return. Doing your taxes the right way from the start is always the best advice. In part two of our three part series on Tax Tips to Avoiding a Costly IRS Audit, here is a list of additional “Red Flags” that can trigger an audit of a tax return.
What might bring your return to the attention of the Internal Revenue Service?
Income – Suspiciously Low: The IRS knows how much somebody in your field earns on average. If you are making less than others in the same profession that raises an audit/red flag. Also, if you have relatively low income but live in a high income area the IRS may review your return.
Income – Unusually High: Though fewer than one-percent of taxpayers are audited each year, those making over $100,000 are 500% more likely to be audited.
Income – Failure to Report: If you file a return but fail to report ALL the income you received, you’ve run up an audit/red flag. All of your wages, interest, dividends, capital gains and miscellaneous income must be reported to the IRS. The IRS receives copies of ALL W-2 and 1099s and computers match these records
Income- Large Swings:. The IRS believes that your income should be consistent from one year to the next. If there are large changes in income, that cannot be backed up by your 1099s or W-2s, this is a audit/red flag.
Itemized Deductions – Too High: Any deductions outside of the “average” will release a audit/red flag. So, watch out if you have a lot of itemization such as (Medical or Dental Expenses)(Taxes:, Real Estate or Personal Property) (Interest: Home Mortgage, Points or PMI-Insurance Premiums) (Gifts: Cash, Check or Fair Market Value of Donated Goods) (Sizable Casualty or Theft Losses) (Unreimbursed Employee Expenses)
Itemized Deductions – Charitable Non-Cash – Over $500: If you don’t get an appraisal for donations of valuable personal property or if you fail to file Form 8283 for donations over $500 an audit/red flag appears. Taxpayers are entitled to claim a deduction for the fair market value of the property donated NOT the original cost. For the current Fair Market Value, there are two free tools at your disposal: ItsDeductible, from Intuit, and DeductionPro, from H&R Block
Itemized Deductions – Overly Generous Charitable Contributions: Charity is wonderful, but too much charity could be audit/red flag. If the average person in your income bracket donates about $500 to charity and you claim you donated $5,000 you better have detailed and accurate receipts.
Itemized Deductions – Employee Job Expenses: .The IRS starts with the assumption that if an employer doesn’t reimburse a specific expenditure made by the employee that expenditure is probably not a true job expense. Consequently, the mere existence of a Job Expense will cause an IRS red flag. So, if you are a W-2 employee you must meet the following guidelines: total of all expenses exceeds two percent of your adjusted gross income; the expenses are deemed “ordinary and necessary”; and the expenses were not reimbursed.
These tax tips are just examples of the type of the proactive, year-round tax guidance we provide to our clients. We have more we want to share with you about IRS Audits so look for our third and final installment of Audit Red Flags in the coming days.
If you need to file your 2011 or earlier tax returns, or have an IRS or State Tax problem, our experienced tax professionals can help. For more information about our tax services, visit us today at www.professionaltaxresolution.com. You may also Contact us by phone at (877) 889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.