I’m Being Audited – Why, and What Do I Do?
There is nothing more stressful than an IRS audit, especially when you feel that you must face it all alone. Fortunately, that is not the case. You can, and should, seek professional help if you are being audited. In fact, after years of experience helping individuals go through this arduous process, we have learned that the best thing you can do for your peace of mind is hire a seasoned, experienced tax attorney.
When faced with an audit, many people can’t help but wonder, “Why me?” They feel like one of the unlucky few who are chosen at random by the IRS. However, the IRS seldom works in random ways. In reality, they are very specific about who they target, and certain factors of your tax return may have caught their attention and made you their new bull’s eye.
If you are being audited, do you know what made your return stand out? There are ten(10) red flags that the IRS looks for when reviewing tax returns:
- Incomes Over $200,000. Recent IRS statistics indicate that individuals with incomes of $200,000 or higher have a 3.26% chance of being audited. That is one in every 30 tax returns and nearly four times higher than people with lower incomes. Individuals with incomes of $1,000,000 or more have a 1 in 9 chance of being chosen for an audit.
- Large Itemized Deductions. You are entitled to ALL of your deductions, but if they’re greater than the target range for people at your income level, the IRS will look at your return more closely.
- Home Offices. There is nothing wrong with having a home office, but if you do claim one on your return it must meet all of the IRS guidelines. For instance, if your office doubles as a playroom or dining room, you cannot deduct it.
- Deducting Meals, Travel and Entertainment. Schedule C may be a treasure chest for the self-employed, but it’s a gold mine for the IRS. History has proven that most under-reporting of income and overstating of deductions is done by the self-employed. Because of this trend, the IRS keeps an eye out for big deductions for meals, travel and entertainment.
- Claiming 100% Use of Your Business Vehicle. Claiming that your vehicle was used solely for business is like waving a red flag in front of a bull – you’re just asking them to charge. If you are going to make this claim, be sure to have detailed mileage logs and exact calendar entries. Sloppy record keeping will not help you and will only make it easier for an IRS agent to disallow your deduction.
- Missing Investment Income. What you put on your 1040 (or any related IRS Forms or Schedules) must match the information the IRS receives about the investments you made this year. The IRS will receive the correct information whether or not you are the one supplying it to them. Do not risk them catching you purposefully omitting information.
- Incomplete Returns. Even if you accidentally missed a section of your return, an empty space sends up a red flag to the IRS.
- Business Losses. Business losses are common—especially in a tough economy. However, that does not mean that the IRS will automatically accept them. Claiming a business loss definitely draws attention to your return.
- Charitable Deductions. Unfortunately, many people are dishonest about their charitable donations. Because of this, the IRS requires that you have proper documentation for all donations. Be sure to keep appropriate records, like cancelled checks or receipts, for your donations in case the IRS takes special notice and wants you to prove your deduction.
- Medical Expenses. Deducting medical expenses can bring your return to the attention of the IRS. Medical expenses must meet all of the qualifications laid out by the IRS in order to qualify as a deduction. Keep in mind that cosmetic surgeries, health club dues and over-the-counter medicine cannot be included and will most likely be questioned if you try to include them as a deduction.
If the IRS noticed any of the above on your return, that may be why you’ve been selected for an audit. However, just because you’re under review does not mean that you did anything wrong or that you must face the IRS alone.
In the face of the IRS everyone feels small. However, when you work with a professional team that regularly battles the IRS, you’ll see how easy it can be to take a deep breath, stand up tall and fight for what is rightfully yours.
Here’s what we suggest you do in order to overcome an audit without breaking a sweat:
- Don’t ignore the letter. Ignoring the IRS is by far the worst thing you can do. Show them you’ve got nothing to hide, and request the paper work they’re planning on sending you. By setting the pace of your audit, you’re putting yourself in the driver’s seat. This serves two purposes: 1) You’re putting yourself in the mindset that you’re in control and 2) You’re going to be far more prepared than the IRS expects you to be, giving you a one up in the situation.
- Get representation. It is not a smart idea to go at an audit alone. The IRS has a reputation for being big and scary for a reason. To get the best outcome, hire somebody who not only knows what they’re doing, but who has experience going up against the IRS —and winning!
- Do not hold back or lie to the IRS. Studies show that only 2% of the IRS audits are random; the other 98% of the time, they have very specific questions they want answered. Do your best to answer those questions to their satisfaction and you have very little to worry about.
- Negotiate an appeal, but only if you need to. If the IRS is right about one or more discrepancies on your return, you don’t have much room for negotiation. However, they may still be open to an appeal.
At The Willis Firm, we pride ourselves on being straightforward and honest with you about all of the details of your audit.We pride ourselves on getting the best possible outcome for our clients.
To see how we do this, visit http://www.irsallstar.com/about-us.