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Many people think IRS audits involve menacing agents incessantly ringing your doorbell at 3am, while you frantically hide in the attic floorboards. The reality is some IRS agents do carry guns, but the vast majority of audits are nothing like this. In fact, I have been involved in IRS audits where we didn't even speak to a human at the IRS! With that being said, I think we can all agree that it's in your best interest to stay away from an IRS audit. But how can you do so? The overall odds of being audited are only about 0.4%, but there are certain triggers that may increase this percentage. The purpose of this post is to give you a number of useful tips to help you avoid the wrath of Uncle Sam.
Do Your Tax Return Amounts Make Sense?
A number of years ago, I received a call from someone (not a client of mine) who had been audited in two of the last three years. After reviewing the actual audits and their tax returns, the issue became obvious to me. They were a family of seven living in a nice home with a large mortgage, but the income amounts reported on their tax returns were far too little for the lifestyle they were living. They weren't doing anything illegal - they were receiving financial help from family, which is not reportable as taxable income - but the point is as follows: you need to make sure your tax return makes sense. Let me give you another example: A current client of mine gives 60 percent of their income to charity each year. While it's an extremely noble deed, I have made my client aware that we need to be prepared for a potential IRS audit. This may be beyond the realm of what the IRS deems as "normal." Everything on this person's tax return is squeaky clean, and they make sure to save all of their receipts. The point is this: Make sure your tax return amounts seem reasonable.
Cash
If you engage in a lot of cash transactions, you may trigger additional IRS scrutiny. In case you are unaware, the IRS receives reports from banks of cash deposits in excess of $10,000 in a single day. These reports are known as "Currency Transaction Reports" or CTRs. A CTR may also be sent to the IRS for smaller $ transactions if the customer appears to be deliberately avoiding the $10K threshold. CTRs are not a new concept, as they have been around in some form since 1970. Their purpose is to protect financial institutions from being misused by criminals to launder money obtained illegally. The bottom line is this: If you make larger cash deposits - even if you report them on your tax return - be prepared for potential increased IRS interest.
Estimating Expenses
This one is for those of you that have your own businesses. It's not cool for you to estimate your business expense amounts on your tax returns. You need to give the actual expense amounts. How would the IRS know if you were doing so? One example of this is when expense amounts are rounded to the nearest hundred, fifty or even ten, things begin to look fishy. If your office supplies expense was $17,000, your auto expense was $18,500 and your travel expense was $9,100, it looks like you estimated your amounts. This happens more than one would think. I have seen this first-hand when reviewing tax returns prepared by taxpayers or even other accountants. You should be tracking and reporting the accurate amounts of business expenses you had each year. Don't guess.
Only Reporting Credit Card Sales
This is another potential audit trigger for business owners. If your business is in an industry that normally receives cash from customers, it is realistic for the IRS to expect that you had credit card and cash sales. The IRS likely has a record of all of your credit card sales (from a form known as a "1099-K" that gets sent to them by the credit card companies), so they will be aware if you are not reporting any additional sales. Years ago, I received a request for help from a business owner in the food service industry whose accountant did this exact thing. Their tax returns showed a revenue amount that precisely matched their credit card sales. If you only report your credit card sales on your tax return, you may be asking for an IRS audit.
Audits are never fun. With a little planning, however, you can help decrease the likelihood of an audit, or at the very least be more prepared if you are audited. I sincerely hope you found these tips to be valuable.
>Accounting insights by Aaron Shleifstein from A. Shleifstein & Co. CPA's.
A. Shleifstein & Co. CPAs is a full-service accounting firm, offering white-glove service. You've worked hard building your business. You continue doing your thing, while we handle all of your tax filings and help limit your tax liabilities.
