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Avoiding IRS Red Flags

Author: Keith Huggett

When it comes to the IRS everyone likes to avoid them if possible.  Sometimes you can, sometimes you can't.  It's always helpful to have some tax relief tips to illustrate ways to keep them at bay.  Suffering through a tax audit is no fun; it's often an intimidating, time-consuming process that can turn out to be very costly, especially if additional penalties are assessed.  To illustrate the top 5 tips for avoiding IRS red flags, the Tax Office, Inc., has put together a short infographic, the Top 5 Tax Relief Tips, to assist you.

In order to avoid the IRS flags, it is imperative that you report 4 out of the 5 tips correctly. Unfortunately one comes down to blind luck and there isn't a lot you can do to influence that.

1. The Earned Income Credit - To qualify for the EITC, you must follow the rules and file a tax return even if you do not owe any tax or are not required to file. To see if you qualify for the EITC, the IRS has several publications to assist you. In short, there are specific requirements for the EITC including age, earned income, and qualified dependent criteria, to which you must qualify for. Also, if you are married, you cannot file as "Married Filing Single" and claim the EITC.

2. Claiming Head of Household Status - Consider the following questions before claiming:

• What makes you “unmarried”?

• What is a closely-related dependent mean?

• Have you correctly performed the “Support” and “Residency” tests?

• Have you paid more than half of the cost to maintain a home for yourself and your qualifier?

3. Random Chance - Here's where being lucky or unlucky comes into play.  The IRS uses a computer program to randomly select tax returns for audit purposes.  According to the IRS, "Your return may be selected for examination on the basis of computer scoring. A computer program called the Discriminant Inventory Function System (DIF) assigns a numeric score to each individual and some corporate tax returns after they have been processed. If your return is selected because of a high score under the DIF system, the potential is high that an examination of your return will result in a change to your income tax liability."

4. Reporting Income - During the course of the year you may or may not incur 1099 income.  If you accidentally forget to include this information in your return it will cause IRS issues for you.  Be sure to include all of your income when filing your taxes.

5. Missing Information - The IRS requires that specific information be included on your tax return otherwise it will be rejected.  This information includes your signature, SSNs, date, and filing status.  Leaving out this information can result in he return of your tax return, the delay of any refund you were expecting, and also the possibility of audit.

Never give the IRS a reason to further “examine” your tax returns.  People usually get audited because the information they provided; the income, expenses and credit information just doesn’t add up and the IRS wants to know why. While it’s impossible to avoid all tax audits (because some are randomly selected), staying compliant will go a long way toward audit prevention.

If you are an individual or small business who is under audit or are concerned about being audited in the future, it is in your best interest to consult a qualified tax professional experienced in IRS audits to discuss your tax options and an audit strategy.  At The Tax Office, Inc., we’ll champion your cause with the proper government agency to gain a satisfactory solution to your collection, audit or other tax representation issues. 

Contact us for a confidential, no cost or obligation discussion of your tax issues, or call at 916-773-7053.

Double Checking Can Lead to Fewer Errors

Author: Keith Huggett

The IRS makes a lot of money on tax audits. In fact, one survey of IRS audit personnel who focus on corporate returns indicates that they generate more than $9,000 in revenue for every hour they spend reviewing returns. To ensure your tax return avoids attracting the scrutiny of audit-happy IRS employees, don't make these simple mistakes:

• Math errors: The IRS uses powerful computers to check your return, and if you make an error, you can expect a letter.
• Discrepancies with information returns: Believe it or not, the IRS used to accept your return without matching it to 1099s and other information returns. That isn't the case any more. Today, the IRS checks your return against every information return that carries your social security or employer identification number, and if they find a discrepancy, you will probably end up enduring an IRS audit. There is a lot of information available about 1099s and you may be under the impression that 1099s don't apply to you. Check it out just to be sure.
• Too many deductions: The IRS has a good sense of how many deductions a normal return for your income level and type of business will have. While they allow for some variation, if you claim too many deductions, they will flag your return for audit.
• Illegitimate home office deductions: Many of the people that claim home office deductions claim them illegitimately. Because of this, even if you are entitled to it, claiming it makes you a target for an IRS audit. Before filing for the deduction, make sure that you are really allowed to claim it. If you are, it's probably worth the risk, especially when you include the depreciation allowance against the value of your house.

Do You Have Audit Insurance?

Author: Keith Huggett 

You might not think this is a serious topic, but it really is. If you do not have audit insurance you should probably purchase some. According to Accounting Today, despite cuts to personnel and their budget, the IRS has increased the number of audits performed by 20% since 2009. An audit defense plan can be bought as part of your tax or business package, or it can be bought as a single item. If you get audited and you do not have an audit defense plan in action, the costs of dealing with the IRS or State Agency are going to quadruple, and I'm not only talking about monetary costs. Without an audit defense plan, you have to deal with the stress and anxiety of dealing with the IRS all on your own, which is something you really do not want to do. It is so much better for you to let a tax professional help you. It's our job and we can make the process much smoother for you.

An audit defense plan covers you on a month to month, or annual basis from the time you purchase the plan, until you stop service, depending on where or with whom you get the plan. It is very similar to any other insurance plan.  You are provided with service, should you be audited, while covered. Should you stop payment on your plan, your coverage ceases along with your audit protection.

While you are covered, if you receive any government notice regarding your income tax return you will have the safety and security of knowing that you are protected by a qualified, experienced professional who will fight your battles with the IRS or State agency. This means that when you get that letter, you just send it to your tax professional and they should handle it. Your tax agency should also represent you in either a correspondence, field, or office audit by any government agency with no additional fees.  If your audit goes to appeals there may be some additional fees. 

You should be aware that not all tax offices offer their audit defense plans in this manner and their terms may be different.  At The Tax Office, Inc., we offer our audit defense plans in conjunction with our business and tax packages. Please contact us with any questions you may have about our audit defense plan. We also provide helpful information on our website for when and if you receive that notice of audit for your personal or business return.

Were You One of the Unlucky Ones?

Author: Keith Huggett

It was a tough year for the IRS in 2012. They underwent budget cuts, computer problems and they even took on the court system. And yet they maintained their service and enforcement priorities despite these challenges.

In the enforcement area, audits of individuals topped 1 million for the sixth year in a row, with a 1.03% coverage rate out of all tax returns filed.  Audits in the upper income ranges remained substantially higher than other categories. 

The IRS increased examinations across all categories of business returns by more than 12% in FY 2012, with the largest increases coming in audits of flow-through entities, which include partnerships and Subchapter S corporations. Rates exceeded 20% for the largest corporations.

The IRS collected more than $50 billion in enforcement revenue in FY 2012, the third year in a row topping that figure.  This was lower than 2011 and 2010, but is still quite a bit in revenue. The Fiscal Year 2012 Enforcement and Service Results tables detail the audit, collection and taxpayer service numbers.

With statistics such as these, it stands to reason that either your business or your personal return may be selected for audit this year. You also should consider, if you haven't already, investing in an audit defense plan, so that you have someone to go to bat for you with the IRS, should you get audited.  If an audit does occur, remember that it does not reflect upon you in any way. It does not mean that there is anything wrong with your return. It can be as simple as the IRS focusing on something, like a credit or deduction, which, though you honestly qualify for it, when they put in their data for audit selection, flagging your file. If you receive a notice from the IRS, and you have some questions, please feel free to contact us, we're always here for you.  There is also some free helpful information on our website about personal and business audits.

Three Types of IRS Audits and How to Prepare for Them

Author: Keith Huggett 

If you’ve received the letter most tax payers dread – correspondence from the Internal Revenue Service - what you do next and how you handle this correspondence can set the results for or against you.

There are 3 types of audits. A correspondence audit is really just a letter asking for more information or clarification as to why something was or was not included. An office audit means that the IRS would like you to come in to their office to review certain financial matters

A field audit means that an agent will be coming out to visit you. This is the most serious type of audit and you should get professional representation immediately

Unfortunately, people make critical mistakes during the audit process. Here’s a list of the top 13:

1. Ignoring the audit notice
2. Not reading the audit notice carefully.
3. Bringing more records and documentation to the audit than requested
4. Lack of preparation and organization
5. Arguing with the auditor, even if they're being unreasonable.
6. Deliberately lying during an audit 
7. Giving only copy of original documents to the IRS. 
8. Make it hard for the auditor
9. Beginning the audit interview with a chip on your shoulder,
10. Volunteering information that hasn’t been requested
11. Coming to the audit with missing records
12. Not understanding or knowing rights
13. Not bringing your accountant with you

If you get a notification of an audit from the IRS don’t panic! Preparation for dealing with your audit starts with the most  critical step – get professional representation firm a qualified firm like the Tax Office.  

Contact us here, or call us at 916.773.7053916.773.7053. for an immediate, no obligation confidential discussion of your situation.

Get Professional Tax Representation to Solve Your IRS and State Tax Problems

Author: Keith Huggett 

While the IRS does not share the specific parameters that trigger audits, certain areas of the return are more susceptible:

•  If you have a sole proprietorship you are more likely to be audited
• If your charitable contributions are a higher percentage of your income than is standard for your income level, actually if any of the various itemized deductions are significantly high for your income level, it could trigger an audit.
• You might be "audit bait" if any of your itemized deductions are significantly higher for you then they have been in the past.
• If you have previously been audited for unreported income for which the IRS has received 1099 or other income statements, or if the IRS has audited you in the past and had significant changes to your return as filed, you are more likely to come under their scrutiny again.
• There are also compliance audits which are just about being randomly selected by the IRS.
• You could have been reported for a specific violation by a disgruntled employee, co-worker, or business partner. 

Don’t panic if you get a notification of an audit from the IRS! The first step – get professional representation firm a qualified firm like the Tax Office. A professional who is meeting with the IRS for your benefit will keep calm and focused on the matter at hand, the tax matters, and tax decisions made

Contact us here, or call us at 916.773.7053916.773.7053. for an immediate, no obligation confidential discussion of your situation.

Avoidable or not?

Author: Keith Huggett

As the tax year comes to a close and you start to plan your tax deductions, talk to your tax preparer to find out what is reasonable and what is not. While the tax code allows you to claim every deduction you are entitled to, the IRS watches some more than others. Here are five audit triggers that they will, and you should, watch:

1. Unreported 1099 income: The IRS' computers automatically match your return against the 1099s that they receive. If there is a discrepancy, they will inquire about it -- usually by auditing you.
2. The home office deduction: When you claim it legitimately, the home office deduction can be extremely valuable. However, because the rules for claiming it are very complicated, many of the people who file for it are not entitled to it. As such, it is a major IRS audit trigger.
3. Dependent issues: The IRS requires a Social Security number for each dependent for a reason. They cross-reference your return against other people's returns to ensure that the same person isn't being used as an exemption twice. Given the complexity of modern families, and the relatively high divorce rate, this happens more than you expect.
4. Cash earnings: If you have a job, business or investment from which you are receiving a meaningful portion of your income in cash, the IRS thinks that you might be underreporting your income. After all, there are no real records to establish what you really received. With this in mind, an IRS audit is extremely likely if your reported income is outside normal ranges.
5. Too many deductions: The IRS compares your return against other people's returns to calculate a DIF, or "Discriminate Index Function." The more your return varies from the norm, the higher its DIF score will be, and the greater the risk of an IRS audit.

The 6 Things You'll Need to Survive

Author: Keith Huggett

A tax audit is always stressful, even if you are confident in your accounting. Adequately preparing in advance can bring your stress level down and increase the chance of the audit going smoothly. The more organized and prepared you are, the easier the process will be for yourself and the auditor.

The first step is to get organized. Before your tax audit, make sure you have all the associated records for the tax return in question. The more information you can provide to the IRS to support your position, the better. Be prepared with the following six types of documents:

1. Receipts and bank records: The IRS means it when it recommends you save your receipts. Bank and credit card statements are now also accepted as proof of payment, so if you don't already have them, request them from your financial institution.
2. Accounting records: Whether you use QuickBooks or a simple Excel spreadsheet, be prepared to show the tax auditor your books.
3. Time-tracking methods: Your electronic calendar, paper date book and any other place you keep track of your time will give the auditor proof of travel dates, meetings and other information they may need to justify certain expenses.
4. Vehicle records: If you claim your vehicle as a business expense, make sure you have the receipts from repairs, a mileage log and gas bills.
5. Travel and entertainment justification: This particular category gets a lot of scrutiny from the IRS, particularly when it comes to small business accounting. You will need the receipts and other written documentation regarding the purpose of the expenses.
6. Property expenses: Whether you rent or own your office, you will have business expenses associated with the space. You may need your lease or a purchase contract, and don't forget about receipts for large office expenses such as copiers, computers and other equipment.

Preparation is Key for Success

Author: Keith Huggett

Nobody looks forward to an IRS audit. It's an intimidating experience that can be disruptive to your business, especially if you have a small operation. However, you can make it go more smoothly by preparing in advance.

Follow these tips to help you survive your next IRS audit:

• Study up: Review all of the tax returns in question and make sure you understand them. You'll need to know how you arrived at all the numbers; if you worked with a tax preparer, have them explain exactly what they did.

• Gather files: An IRS audit is the reason you save all those receipts. If they are not already organized, take the time to do this before the audit. Your audit letter will include a list of records you need to present; these may include bank statements, canceled checks, receipts, credit card statements and accounting files.

• Substantiate claims: Be prepared to justify business expenses; you may need to explain why you took certain deductions. Auditors pay particular attention to deductions taken for equipment that is used for both business and personal reasons, including cars and computers. If you don't keep a usage log for these items, you may have to make reasonable estimates and support them with other records. Travel and entertainment claims are also subject to higher scrutiny, so be prepared with receipts.

• Property records: If you claim business deductions for property you will need to bring your lease or purchase contract.

The more prepared you are, the better the audit is likely to go. Auditors appreciate organization; it not only makes their job easier, but it also makes you appear more credible and trustworthy. View the auditor as a potential ally, not as an adversary. If you have maintained good records and have not made any egregious business deductions, your IRS audit does not have to be a negative experience.

Engaging professional tax representation is one way to ease the burden. If you're facing an IRS audit, call the experts at The Tax Office, Inc. to help you. Contact us today to discuss your IRS letter or tax notice.