Tax season is in full swing. Anyone that has been gathering their tax documents has likely had concerns about the potential of an audit. What if the Internal Revenue Service (IRS) digs deeper into your returns? What if your deduction numbers are more estimate than fact and these "fudged" amounts are questioned?
These concerns are not uncommon. In fact, the popular news source USA Today ran a piece on the issue, noting two of the red flags that can trigger an IRS audit. The first flag comes from income and expenses that don't align with the average business in the same industry, like an extreme number of miles driven for a service that shouldn't need travel, or too many entertainment charges when event attendance is not customary for your business.
A second flag is raised when deductions don’t match up to the filer’s income bracket. "As a common example, consider that the average taxpayer with an adjusted gross income (AGI) between $100,000 and $200,000 claims a $4,130 charitable deduction. So if your AGI is $150,000 his year, and you claim charitable contributions of $4,000, it may not attract the IRS's attention. If you claim $40,000, however, it's much more likely the IRS will want to have a word with you."
Why are small businesses under increased scrutiny? The reason for this close review by the federal agency is the fact that small businesses have more opportunities to be "flexible" with their numbers than most filers. The IRS is particularly inclined to pay close attention to businesses that repeatedly report losses.
What if my deductions are too high? As noted in the piece in USA Today, “the IRS knows what the average taxpayer in your income level donates to charity and pays in mortgage interest each year.” If you have oddly high deductions, ensure you can back them up with documentation. If you attempt to exaggerate these numbers, the IRS will likely catch the attempt and dig in to your returns for further review. This provides an important reminder to keep your records in order.
What if I am subject to an audit by the IRS? If the IRS conducts an audit and claims you owe significant tax liabilities, contact an experienced tax controversy attorney, like those at Robert J. Fedor, Esq., L.L.C. Those facing these allegations have options, and an experienced lawyer can review your situation and discuss the best solution for your tax issue.