1. Don't panic- if you get a letter from the IRS or California Franchise Tax Board- it may not be an audit- it may be something specific they're asking for that can easily be provided to settle the issue quickly. Call us, send us the letter and we'll let you know.
2. Figure out what they want- sometimes it's just some of your tax payments that have been misposted on their computer- if you didn't write your Social Security number, the year and the form number, i.e. "1040" on your check then your payments may have been recorded incorrectly. (See next page for solutions)
3. Get help- Sometimes the issues can be resolved with a letter. Sometimes it calls for a field audit (at your place of business) or an office audit (the IRS office). In any case you don't have to talk to the IRS by yourself. Actually you don't have to talk to them at all. You can get someone to represent you. Then the IRS must talk to your representative. Our clients never talk to the IRS. As with any adverse legal proceeding- you might say something that can be used against you. For a client who admitted to the IRS, before coming to us, that he shouldn't have deducted travel expense to his job, we presented evidence that he was on a temporary assignment and therefore, could deduct it.
4. Gather your records- Look at the notice and see what year it's for. Then get your records that you used to prepare that year's tax returns. Work with us or another tax professional to determine exactly what information you will give the IRS and how it will be presented. Start early in case you have to request copies of bank or investment account statements.
5. Don't Ignore the IRS- It is never a good idea to ignore the IRS or other taxing authority. You or your representative should contact them as soon as possible and notify them that you are gathering your information. Usually you will be able to get a "hold on collection efforts" while you obtain your records and prepare your response. Again- it's better to have a tax professional contact them for you.
6. Present As Much Information As You Can- Even ifyou're missing some of your records present what you have to the auditor. Oftentimes he or she will let it slide that you are missing some of your documentation, especially if it appears that you have the majority of your records to support your deductions.
Showing posts with label Audited. Show all posts
Showing posts with label Audited. Show all posts
Monday, October 4, 2010
Tuesday, September 1, 2009
7 Ways to Avoid Being Audited By the IRS
We’ve all talked to the next door neighbor who has his brother in law preparing his tax returns. He always gets all his withholding back because his brother in law comes up with very creative deductions, like his cat for a dependent, his kid’s private school tuition for child care credit and the cost of his built-in pool for medical expense.
Well, the truth is you can deduct whatever you want on your returns until you’re audited. Then you’re screwed!
Keep in mind, the federal statute of limitations is three years and states are three to four years. That means the IRS has three years to audit your return. They don’t even look at your return until two years after you’ve filed it. So, by the time they audit you, disallow your deductions, recalculate your tax and assess a deficiency it’s three years after you filed and you’ve got to pay interest and penalties in an amount almost as much as the additional tax.
It’s better to keep receipts and records and deduct only what you’ll be able to defend in an audit. Another bit of advice is watch how you report your income and deductions on your tax return:
1. It’s all in the presentation! Schedule C “Profit or Loss from Trade or Business” is the area that usually gets people audited. The IRS is looking at deductions. Give as much detail as possible on the schedule of expenses. Don’t have a lot in “miscellaneous expense” or “office supplies.”
2. Report all of your income. Sounds simple- but many people miss a basic check you should do before you file. If you have 1099 income make sure your income reported on schedule C equals or exceeds the total of your 1099’s. The 1099’s are recorded on the IRS’ computer so it’s an automatic letter to you if your income is less than the total reported to the IRS on 1099’s.
3. If you have received income that really belongs to someone else- usually interest income- report the total amount per the 1099-INT and subtract the “nominee interest” that belongs to the other person. A lot of tax prep software has this feature and will do it for you.
4. Again- they’re looking at your deductions- check Schedule A- itemized deductions- review the standard percentages used by the IRS and make sure you don’t exceed them.
5. Office-In-The-Home- yes- the IRS has made a special form to “flag” the fact you are taking this deduction. But don’t let that stop you! If you have an office in the home you are entitled to this deduction. As long as the percentage of business use (computed by taking the square footage of your office divided by the square footage of the whole house or apartment) is a “reasonable” amount you won’t be audited. Make sure it’s a “reasonable” %- I wouldn’t go over 20 %.
6. Vehicle Expense- another flag- but complete the detailed schedule showing how you computed the deduction and make sure it’s attached to your return. If filing electronically find software that includes the detail.
7. Non-cash Charitable Contributions- IRS hot topic right now- gifts of used clothing and stuff to Goodwill- yes another form to flag it- but complete the form 8283 with name and address of charity, date of donation and estimated value. Put descriptions of items given- use the large items like sofa, desk, TV, video recorder, instead of “miscellaneous.” Enter the cost- we usually estimate this a three times the value.
These are just a few areas where you can avoid an audit by being careful with your presentation. If you have any questions about your deductions or presentation call Law Offices of Patricia Rowe at 925-256-1000.
Well, the truth is you can deduct whatever you want on your returns until you’re audited. Then you’re screwed!
Keep in mind, the federal statute of limitations is three years and states are three to four years. That means the IRS has three years to audit your return. They don’t even look at your return until two years after you’ve filed it. So, by the time they audit you, disallow your deductions, recalculate your tax and assess a deficiency it’s three years after you filed and you’ve got to pay interest and penalties in an amount almost as much as the additional tax.
It’s better to keep receipts and records and deduct only what you’ll be able to defend in an audit. Another bit of advice is watch how you report your income and deductions on your tax return:
1. It’s all in the presentation! Schedule C “Profit or Loss from Trade or Business” is the area that usually gets people audited. The IRS is looking at deductions. Give as much detail as possible on the schedule of expenses. Don’t have a lot in “miscellaneous expense” or “office supplies.”
2. Report all of your income. Sounds simple- but many people miss a basic check you should do before you file. If you have 1099 income make sure your income reported on schedule C equals or exceeds the total of your 1099’s. The 1099’s are recorded on the IRS’ computer so it’s an automatic letter to you if your income is less than the total reported to the IRS on 1099’s.
3. If you have received income that really belongs to someone else- usually interest income- report the total amount per the 1099-INT and subtract the “nominee interest” that belongs to the other person. A lot of tax prep software has this feature and will do it for you.
4. Again- they’re looking at your deductions- check Schedule A- itemized deductions- review the standard percentages used by the IRS and make sure you don’t exceed them.
5. Office-In-The-Home- yes- the IRS has made a special form to “flag” the fact you are taking this deduction. But don’t let that stop you! If you have an office in the home you are entitled to this deduction. As long as the percentage of business use (computed by taking the square footage of your office divided by the square footage of the whole house or apartment) is a “reasonable” amount you won’t be audited. Make sure it’s a “reasonable” %- I wouldn’t go over 20 %.
6. Vehicle Expense- another flag- but complete the detailed schedule showing how you computed the deduction and make sure it’s attached to your return. If filing electronically find software that includes the detail.
7. Non-cash Charitable Contributions- IRS hot topic right now- gifts of used clothing and stuff to Goodwill- yes another form to flag it- but complete the form 8283 with name and address of charity, date of donation and estimated value. Put descriptions of items given- use the large items like sofa, desk, TV, video recorder, instead of “miscellaneous.” Enter the cost- we usually estimate this a three times the value.
These are just a few areas where you can avoid an audit by being careful with your presentation. If you have any questions about your deductions or presentation call Law Offices of Patricia Rowe at 925-256-1000.
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