Deductions that Trigger an IRS Audit
The Internal Revenue Service no longer conducts face-to-face file reviews for every taxpayer who has been flagged for an audit. Instead, most audits take place either by mail correspondence or telephone. These less intrusive types of file reviews are not as likely to become confrontational, and the taxpayer is usually able to keep the matter private, without as much interruption to their daily lives.
The Internal Revenue Service no longer conducts face-to-face file reviews for every taxpayer who has been flagged for an audit. Instead, most audits take place either by mail correspondence or telephone. These less intrusive types of file reviews are not as likely to become confrontational, and the taxpayer is usually able to keep the matter private, without as much interruption to their daily lives. Most often a taxpayer or business is scheduled for a field audit when calculations have been performed incorrectly or deductions appear suspicious. Walking into a field audit without a tax attorney can be one of the biggest mistakes a taxpayer will make. If an IRS agent asks a loaded or a tricky question, and the taxpayer lies, provides uncertain information or says they don't know, they may have just made a false statement to a federal agent - which is a felony.
The best way to handle the IRS is to not get audited in the first place. While there are no guarantees against being audited, there are certain items that can trigger the IRS's interest and lead to flagging a case for audit. Taking extra care in calculations and telling the truth in these areas will keep a taxpayer safe and free of fines or penalties if they are audited.
• Donations – Congress has cracked down on what can be considered charitable donations. This is a heavily flagged area for mail audits when donations add up and become even a small write off. Donations of $250 or more, require a letter from the charity organization describing the item(s) donated. Read up on the law before taking this deduction.
• Per Diems - Certain states are beginning to average the cost of meals and lodging in their various counties and the IRS is paying attention. Exact documentation and receipts explaining the nature of the business must be in the taxpayer's records before filing the return.
• Employee Reimbursements – Uniforms for work need to be articles of clothing that would never be worn for any occasion other than work. The actual receipt and not just a credit card statement must be in possession of the taxpayer.
• Small Businesses – Unfortunately, the little guys are being targeted. There is an entrenched IRS belief that a large amount of the tax gap can be replenished in this area. The nature of small business is such that mid- to high-level management is more active in daily activities of accounting practices, offering a greater opportunity to countermand the numbers of the firm's accountant before tax returns are filed.
• LLC and S Corps – Some individuals use LLC and S Corporation (Sole Proprietorships) for federal income tax purposes in order to hedge taxes and create layers to protect certain assets.
• Freelance Filing – Another spot from which the IRS is looking to fill in the tax gap is in the group of taxpayers filing under the 1099 classification. This type of worker status is much like a cash income trigger that can be misrepresented on a return.
The law of averages used to dictate that if you made under $200,000, your chances of a field audit were 1 in 500, and 1 in 100 for any type of an audit. Today, those odds are no longer valid, and some tax professionals are seeing the odds more like 1 in 7 for the average income taxpayer to become involved in a mail audit. In fact, 2008 will probably be a tax year in which more lower income taxpayers are audited based on their adjusted gross income versus how much income tax they are paying. Gross income is often a confusing area and one of considerable agitation between taxpayers and the IRS. The nature of gross income is complicated, especially for taxpayers filing returns without help from an accountant or a tax attorney.
When doing taxes without professional help, double check and calculate all numbers carefully, have documentation accessible and if a mail correspondence audit takes place – cooperate! Turning an audit-by-mail into a field audit can turn ugly. During the course of a normal tax investigation, an IRS agent will want to determine how accurate the tax return is as filed in comparison to documents on file with employers and taxpayers. They are also interested in discovering whether or not any degree of fraudulent tax reporting has taken place. This means every single receipt, letter from a charity, document from work, county averages of lodging and anything else pertaining to deductions will need to be produced. This type of audit is all too reminiscent of the old face-to-face, intrusive audits that the IRS and taxpayers want to avoid. Help from a tax attorney ensures the taxpayer has representation from a professional on their side, which will end in a much more favorable result. After all, the IRS has plenty of professionals ensuring they are well represented.
ABOUT THE AUTHOR: Steven Klitzner
Steven Klitzner is a qualified tax attorney at Florida Tax Solvers, specializing in helping people solve their IRS tax problems. His experience working with the IRS on a regular basis has given him the knowledge to advise on tax problem resolution services, including audit representation and wage garnishment.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.