Doing Your Own Taxes
Telltale signs your company is headed for an audit
It’s the day of the internet, Google, a computer on your desk and an even better one in your pocket, Skype, FaceTime, apps, virtual currency, and hybrid vehicles that never require a drop of gas.
We can never get lost again. You can locate Jupiter and Saturn and watch your home from your office. You’ll never be late again or lose anything. You can hold 1,000 pictures of your cat in your hand, see what the weather will be by the hour, pay bills, and even manage health conditions with an app.
You can even prepare your taxes without the use of an accountant.
There is no doubt that we’ve come a long way from the 1990s, when there were very few people who knew the tax code and could fill out a paper IRS form properly. Now, technology is widely available, and many can create and file their own returns in a matter of hours and avoid any issues going down the road. On the other hand, there are those who need their taxes done by a CPA, attorney, enrolled agent, or other qualified professional.
ATTRACTING AN AUDIT
Many taxpayers are walking, talking targets of the IRS. They include the following laundry list of red-flag-waving people:
1. If you earn more than $200,000 in annual income, your audit risk is greater than 1 percent per year. Over a lifetime, the audit risk exceeds 50 percent. If you make more than $500,000 per year, your audit risk is nearly 5 percent per year. Expect to get audited at some point and audited hard. When the IRS performs an audit, a taxpayer can generally expect the IRS will take away some of his or her expenses.
2. No income at all stands out. How does a household get by on zero income?
3. If you make $5 million, plan on getting audited at some point once per nine years. However, at this income level, it would be my expectation that this person would have a professional staff on his or her payroll.
4. People who file estate tax returns above the exemption amount should expect to be audited. This seems unexpected, but apparently the IRS wants to know whether the estate is trying to either squeeze in some extra stepped-up basis or alternatively trying to shave off some tax expenses.
5. People filing international returns for any form of income.
6. Those claiming unusual deductions are squarely in the IRS’s crosshairs. No, there is no Free-Man Act, no slave reparations, and, yes, the income tax has been ratified properly.
7. If you own a business and do or claim:
a. Business losses;
b. Rental properties;
c. Loss carryforwards; or
d. Home office deduction.
8. Those who donate large sums of money, including non-cash contributions in the form of property. While it should seem as though the state and federal government benefit from these donations, conservation easements, and property, many taxpayers see a chance to really get one over on the taxing body. Be sure to have a qualified appraisal whenever you give items above $5,000, especially real estate going into a conservation easement.
9. If you are paying alimony, your former spouse’s return had better match yours.
10. You file a paper return. Come on people, we left this behind a long time ago.
11. You take the Earned Income Tax Credit. A lot of people take this who shouldn’t. I’ve seen married couples file head of household. Ouch.
12. Failed to include 1099s? While this is easy to do, it is an open path to an audit.
13. If your numbers are too perfect. If you made $1.2 million and took exactly $7,000 of medical expenses and $10,000 in mortgage payments, you’re suspect. What are the chances that this ever occurs?
14. Amend a return. What is more likely to bother a bee’s nest? Kicking it once or kicking it three times?
15. Have unreimbursed employee expenses. These expenses are easy to make up, so the IRS likes to see source documents. And, please refer to No. 13 above. Don’t buy $100 worth of gas and pay $400 to a government body when the actual expenses are $101.38 and $398, respectively.
16. Deduct 100 percent of a business vehicle. It’s 100 percent business use? You never grabbed a soda on your way past a fuel station?
17. Hobby loss — don’t go there.
18. Do business all in cash. Some businesses are nearly all cash. Most businesses now accept credit, which makes hiding extra cash easier.
19. Own Bitcoin and perform currency transactions.
20. If a third party calls and gives the IRS an anonymous tip.
21. If you have a sketchy tax preparer. Just think about this, your tax preparer’s name and identifying number are at the bottom of your tax return and everyone else’s return he or she has prepared, by law. How long will the IRS crosslink that sketchy business deduction that somebody you never heard of took with you and your tax return. Twenty years ago, it took days; now, it takes seconds.
22. Do you have a loan to a shareholder on your books? This will attract attention, and the first thing the IRS will do is reclassify it as equity and make you pay.
If you do all or some combination of the 22 items above, expect a letter from the IRS at some point in your future.
If you fall into one of the above listed items, do not take a chance on dodging an audit and then having to hire a professional to represent you in front of a skilled IRS agent.
Ensure your tax statements reflect any changes in your life. In practical applications, a questionnaire will not catch everything. Did you have a baby, buy a house, get divorced, or have job-related income expenses? While these are not audit indicators, a change of life represents a change on your tax return that should happen as well. Not every change of life will change your tax return but many do.
You would not swap out engines in your car or rewire your house solely on your own. Taxes should be one item taken seriously. Even if you don’t fall into one of these categories, be sure to at least have your accountant review your taxes. Don’t risk having to talk to an auditor or IRS agent in a language you don’t speak.
Publication date: 4/3/2017