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IRS Audits

What Are Your Chances of Being Audited by the IRS?

General Information on IRS audits

Only a small percentage of all the individual tax returns filed each year will be audited. The selection process is done largely by computer models. These were designed by looking at millions of tax returns and developing "norms."

If your tax return has numbers that fall very much outside these norms, your chances of being audited increase.

Individual returns are divided into groups based on the type of work you do and the level of income you report. For example: The IRS expects to see a certain amount of itemized deductions on tax returns reporting between $50,000 and $100,000 of income. Doctors with a certain specialty in a given geographic area are expected to report a certain amount of gross income. The groupings, breakdowns, and average dollar amounts are a closely guarded secret by the IRS.

Business returns are grouped by the type of business and their geographic location.

If your income is unusually low or your deductions are unusually high for a given year, you should attach an explanation to your tax return. After the computer selects a return for possible audit, a human being examines the return to see if the computer made a proper selection. Your attached documents may keep you from getting contacted by the IRS.

Congress is alarmed by the IRS estimate that about $450 billion is lost to those who cheat on their tax returns.

Three Main Types of IRS Audits

There are three main types of audits done by the Internal Revenue Service.

  1. The simplest is the correspondence audit. You will get a letter from the IRS requesting that additional information be mailed to them or that a proposed additional amount of tax be sent in.

  2. The second level of audit is the office audit. You will be asked to bring certain information to the IRS office for review.

  3. The most complete audits are called field audits. They are conducted at your place of business. It is best to avoid these if possible. Once the agent is at your place, he or she has much more to see and ask about.

Red Flags for Tax Preparation

The Internal Revenue Service is interested in auditing returns that are most likely to produce additional revenue. Here is a list of some of the items which draw attention to your tax return:

  • Participation in tax shelters, including offshore trusts.
  • Use of offshore credit cards.
  • Your occupation if you are in a business which is often paid in cash, such as taxicab driver, hairdresser, or waitress.
  • Businesses run by a single family, especially those reporting on Schedule C, since they often make all the decisions and do their own recordkeeping.
  • Returns claiming a home office deduction.
  • Big deductions for business travel and entertainment expenses.
  • Sloppy tax return preparation.
  • Returns that are filed without the necessary supporting tax return schedules.
  • Business losses several years in a row.
  • Low S corporation shareholder salaries in relation to other distributions.
  • A major change in your income compared to your prior tax returns.
  • Deductions for automobile expenses.
  • Noncash charitable contribution deductions.
  • High mortgage interest deduction and low income.
  • High damage or theft loss deductions.
  • Early withdrawal from an IRA account which is not rolled into a new account or reported on your tax return.
  • Deductions for "independent contractors" (versus employees) on business returns.
  • Conviction of a money crime where stolen property or stolen money is taxable.

This is only a partial list. There are different red flags for different industries, professions, and income levels. The IRS is constantly changing what it uses as audit indicators.

Document Matching for IRS

If you fail to report income on your tax return which was reported to the IRS on a document (such as an interest statement from your bank), the audit adjustment is all but automatic. If you receive interest, brokerage statements, or other information returns with the wrong amounts, try to get a corrected copy. If you can't get a corrected copy, include your explanation with your return as to why you are reporting a different number on your return.

What To Do If You Receive an Audit Notice

If you receive a notice from the IRS, don't ignore it. You can rest assured that the IRS will not just go away. All contacts by the IRS should be handled promptly. Unless you are an accomplished IRS "fighter," you would be wise to seek professional assistance from the very first correspondence.

Getting "chatty" with an IRS agent or providing information or documents which you were not asked to provide is ill-advised. Such excess information may expand the audit into areas that were not of initial interest to the agent. Your attempts at being friendly with the agent may end up costing you more time and money than is necessary.

On the other hand, the only taxpayers who need to fear the IRS agent are those who have cheated on their tax return or who can't provide the documents necessary to support the numbers on their returns.

Wrap up of IRS Audits

If your tax return looks unusual when compared to your prior-year tax returns or when compared to industry or occupational norms, there is a good chance that you will hear from the IRS. Your best defense against a potential audit is a properly prepared and properly documented tax return. If you haven't used a professional tax preparer before, now may be the time to engage one.

Learn more about the other services we offer: Business Services & Solutions & Tax Preparation

Accounting Services

Business Services and Solutions

Business Services and Solutions

Business problems and their solutions are as varied as the kinds of businesses in existence. There are some issues, however, that every business faces. Whatever your business concerns, we can provide the help you need.

Whether you are starting a business or operating a going concern, we can help you select the proper organizational structure and help you secure adequate financing. We will work with you and your banker, lawyer, insurance agent, and other advisors to solve your business problems.

We can assist you with loan applications, pricing, credit policies, cash flow concerns, cost controls, and other management issues. We will gladly assist you in reviewing your operations to see what you might do to be more profitable.

What makes a business successful?

Never stop investigating ways to improve all areas of your business. The astute businessperson will seek information to assist him or her in making the changes necessary to stay profitable in a competitive business world.

Here are some ideas that could improve your profits:

  • Do your homework.
    Before you start a new business, be sure the community can support such a business. Some areas are not large enough to warrant certain specialty shops. A bicycle shop, for example, may take a population base of 50,000 people to make it profitable. A grocery store, on the other hand, can be profitable in a town of only a few thousand.
  • Carefully review business proposals.
    Business deals and special franchises which sound too good to be true usually are. We will gladly assist you in reviewing any business purchase or business proposal.
  • Enlist the services of professionals.
    Accountants, bankers, insurance agents, and lawyers can help you solve your business problems. These professionals handle a variety of business problems every day. They make excellent sounding boards for proposed transactions.
  • Check reasons for incorporating.
    Don't incorporate your business without first checking the long-range tax and nontax considerations. There are many small corporations that would have been better off operating in some other legal form.
  • Listen to your customers.
    You are not only selling products or services, you are selling customer satisfaction. Satisfied customers return to spend more money and are likely to refer new customers to you.
  • Strive to retain customers.
    It is estimated to cost ten times as much to acquire a new customer as it does to retain a current customer through good customer service.
  • Don't make yourself indispensable.
    If your company runs well now in your absence, it will run well in the event of your disability or death. If you are currently indispensable, start training people now. One of the most rewarding forms of retirement is to own your own company and to be absent as much as you like.

Please contact us. You should interview us, as you would any professional, to determine if we will be a good long-term match for you and your business. We always welcome your questions.

Learn about our additional services: IRS Audits & Tax Preparation.

Tax Preparation Services

Tax Preparation

Professional Tax Return Preparation


Today's tax laws are so complicated that unless your financial affairs are extremely simple, chances are you will benefit from at least occasional help from a tax professional. It is too easy to overlook deductions and credits to which you are entitled if you prepare only one return a year. Even the use of computer software is no substitute for the assistance of a seasoned tax preparer.

We prepare hundreds of tax returns every year. We know what to look for when your return is prepared. More importantly, you will have someone to answer your questions during the rest of the year. And we can put you on our mailing list to receive timely tax, business, and financial advice.

Your Tax Deduction Checklist

Whether you're a wage earner, an investor, a business owner, or all three, you should use the tax-cutting benefits available in the tax law. There is little to be gained by paying more tax than the law demands.

Identify the tax-savers for which you qualify. Here's a tax-cutting checklist to get you started. Check the list to see if there are tax breaks that you are overlooking.

Individuals Tax Deductions:

  • Roth IRA
  • Roth 401(k) if employer's plan permits
  • Rollover to Roth IRA
  • Tax-deductible IRA
  • Child tax credit
  • Child care credit
  • Earned income credit
  • Annual gifts to reduce estate
  • Education savings accounts
  • Education expenses
  • American opportunity tax credit
  • Lifetime learning credit
  • Bunching deductions
  • Flexible spending accounts
  • Health savings account
  • Donating appreciated assets instead of cash
  • Qualifying property for personal residence gain exclusion
  • Best filing status
  • Shifting income or deductions from year to year
  • Adoption expense credit

Investors Tax Deductions:

  • Tax-free municipal bonds
  • Long-term capital gains
  • Rental property
  • Tax-free exchange
  • Low-income housing credit
  • Small business stock rollover

Businesses Tax Deductions:

  • Home office deduction
  • Keogh plan
  • SIMPLE plan
  • SEP
  • 401(k) plan
  • First year expensing of business equipment
  • Year-end bonuses
  • Bad debt write-off
  • Disabled access credit
  • Health care tax credit
  • Other business tax credits
  • Tax-free exchange

For your convenience, we have provided a complimentary tax organizer. Print it out, fill in the sections that apply to you, and bring it to your tax preparation appointment.

Contact our office if you have questions or want more information on these and other strategies that could reduce your taxes.

Learn about our other additional services: IRS Audits & Business Solutions & Services.

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