IRS Tax Audit Defense
Let Former IRS Agents be your best tax defense.
You go to your mailbox and there it is.
Everyone fears the dreaded letter from the IRS. You open it up and it is some of the worst news possible, ” you have been selected for a tax audit for years……….
There are ways you can protect yourself from a IRS Tax Audit. As Former IRS Agents, Managers and Instructors we have discovered ways for the average taxpayer to keep themselves from a IRS tax audit.
How to Protect Yourself From An IRS Audit
1. Have your tax return prepared by a reliable tax return preparer. If your preparer promises large refunds without asking to see the proper records for deductions and credits, you know that you will be audited after the return has been filed.
When your tax return preparer deduct items that should have not been deducted, you’re the one who will be audited and you will be required to pay the additional tax, interest and penalties.
If the IRS believes that your tax return preparer is incompetent or deducts large non-existent deductions, all of the returns prepared by that return preparer will more likely be selected for audit.
You do not want a tax return preparer who promises you the largest refund, but a tax return preparer who will compute the correct tax. It is recommended that you hire a tax return preparer who knows the tax law and who deducts items on the tax return that you can properly document.
Don’t forget you are ultimately responsible for the additional tax, interest and penalties.
2. File all your required tax returns by the due date. If you haven’t filed your tax returns, the IRS will eventually audit on you.
By not filing your tax returns timely, the IRS will assess the failure to file penalty at 5% per month up to 25% of the tax. If the IRS determines that your failure to file was attributable to fraud, the penalty will be 15% per month up to 75% of the tax.
Thus, you are always better off filing the tax return by the due date, even if you don’t have the funds to pay the tax because you will not be assessed the failure to file penalties.
3. Report all of your income shown on the Form 1099’s that you have received. Even if you don’t receive a 1099, you still have to report all of your income. If you file your tax return without reporting all of your income, you are risking an audit. If the IRS audits your tax return and finds omitted income, you will be assessed tax on the omitted income plus interest on the tax computed from the due date of the tax return to the date that the tax is paid.
Then, the IRS will apply the 20% accuracy related penalty or the 75% fraud penalty on the additional tax plus the interest on the penalties computed from the due date of the tax return to the date that it is paid.
4. Don’t deduct an office in a home. To qualify for an office in a home deduction, you must use the office for work and it must be your primary place of business. Most taxpayer’s abuse this deduction.
Unless, your office in the home is your primary place of business, don’t take this deduction. Further, let’s say that you properly documented that you used 15% of your residence for business, when you sell the residence, the IRS will correctly argue that 15% of the gain from the sale is taxable income. This will create unintentional tax liability on your part. Unless you have a compelling reason to take this deduction, stay away from it.
5. Don’t deduct a large Sch C loss, unless you truly have a loss. A large Sch C loss means that your business deductions exceeded your income from the activity.
The IRS will be questioning you on the source of the funds to pay for those excess deductions. You will need to document sources of the non-taxable income to pay for that loss. If you sold assets to fund the loss, you will need to document those sales.
The possible sources of the non-table income would include loans, gifts and inheritances. These sources will have to be documented to the IRS, if requested by them.
The documentation would include copies of checks, closing papers, gift tax returns of the person who made the gifts and estate tax returns for inherited funds.
6. Don’t deduct a loss from a business activity that the IRS can classify as a hobby loss, unless you have the documentation for that loss.
If you deduct a loss from a horse racing, dog racing, car racing, a boat chartering activity or any other activity that is fun; the IRS will ask you to prove that the activity is engaged for profit.
Thus, you should have a separate bank account for these activities and a business plan on how you expect to make a profit from the activity. You will need to show valid business projections.
7. When you deduct donations of property to a charitable organization, you need to have the required documentation that will always include a valid appraisal. Only deduct what you actually donated to the charitable organizations and can verify with copies of canceled checks.
8. When you deduct a casualty loss, you need the proper documentation for the deduction. The documentation will always include an appraisal of the property before and after the casualty.
The amount reimbursed by insurance for the casualty. You will also need to prove your adjusted basis in the property before the casualty.
If you have a theft loss, make sure that you report the theft to the police and obtain a police report for the incident.
9. You should always be prepared for an audit by having in your possession all of the documents needed to verify the items shown on your tax return even before it is ever audited.
You do not want to search for the verification after your tax return has been selected for audit by the IRS.
10. If you are selected for a tax audit, call us to ensure the best possible results.
Protect yourself from a IRS tax audit. Have us prepare your next tax return.