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Analysis and laborious information inform us the whole lot we have to know – lower than 1 p.c of the taxpaying inhabitants whose annual earned earnings falls between $15,000 and $100,000 expertise an IRS audit annually. The percentages are that slim! Whenever you mix the small probability of really being audited with accuracy and honesty in your purchasers’ tax returns, their nervousness about being audited ought to start to decrease.

There are some frequent myths about IRS audits that may trigger taxpayers to worry making errors on their tax returns. Let’s evaluation and dispel some frequent tax audit myths. 

#1: Submitting an extension means you’re going to get audited. Submitting an extension doesn’t make a distinction in any respect. The IRS seems for sure inconsistencies or ratios that stand out from the norm. The IRS has restricted assets resulting from finances cuts, and must very strategic in its audits to generate further income. In case you are submitting extensions, reassure your purchasers that they don’t have to fret concerning the extension and the additional time wanted to arrange an correct tax return.

#2: Exhibiting losses 12 months after 12 months will end in an audit. That is solely partially true. In case your purchasers are operating a legit enterprise, they need to present a revenue in some unspecified time in the future. In any other case, why are they participating on this exercise? The IRS has guidelines stopping taxpayers from utilizing losses from hobbies to offset their wages and different earnings. Nevertheless, if they’ve legit bills and receipts to help them, they shouldn’t let the worry of an audit forestall them from deducting the bills they’re entitled to receiving. Being as trustworthy and correct as doable means they’re unlikely to make important errors and fewer more likely to be audited.

#three: Deducting meals, leisure and journey bills means they’ll get audited. In case your purchasers deduct legit enterprise bills, they shouldn’t have an issue. Be certain that they write off meals the place they really conduct enterprise and aren’t private in nature. You could wish to take a look at the share that their meals, leisure and journey bills bears to general gross sales. Ultimately, ensure that the bills are supported by receipts and appointment info.

#four: Claiming a house workplace deduction means they’ll get audited. When solely a small share of the inhabitants had an workplace at residence, this might need been true. Nevertheless, many small companies begin out with a house workplace, or proceed to make use of one, due to the monetary good thing about not paying lease. So, utilizing Kind 8829, Bills for Enterprise Use of Your Residence, is now not an audit set off. Bear in mind: to qualify, your purchasers should repeatedly use a part of their residence solely for conducting enterprise.

Sure pink flags will entice the IRS’ consideration when your purchasers declare a house workplace deduction. Right here’s what you must assist them keep away from:

  • Having an everyday enterprise tackle together with claiming a house workplace deduction – In the event that they have already got a enterprise location, they need to conduct all of their enterprise at that location. There are particular cases the place they will get away with having a enterprise tackle and a house workplace. Be certain that every consumer offers documentation and the rationale for utilizing the 2 places for enterprise. To keep away from an audit, embody an in depth assertion with the reason and documentation concerning the legitimacy of each places on the tax return.
  • Reporting lease bills on Schedule C, line 20b (Hire or lease – different enterprise property) – Within the eyes of the IRS, it seems just like the taxpayer has an workplace at residence and an workplace elsewhere. In case your consumer has legit rental bills, equivalent to storage, take into account reporting these prices on Half V of the Schedule C, as “Different Bills.”
  • Reporting utility deductions on Schedule C, line 25 (Utilities) – All residence workplace utility bills must be reported on Kind 8829.

#5: All IRS letters are audits. Many taxpayers suppose each letter acquired from the IRS is an audit, however this isn’t true. The IRS has three separate types of communication and fact-checking relating to a tax return: 

  1. IRS adjustment letter – That is most likely the best and least intrusive types of communication from the IRS. The adjustment letter is shipped by the IRS to tell taxpayers of a miscalculation or small typographical error. As soon as your purchasers evaluation the errors and agree with the changes wanted, all they need to do is comply with the directions contained throughout the letter and they’re accomplished.
  2. A correspondence audit – That is an audit performed by means of the mail, the place the IRS will ship a letter asking taxpayers to make clear sure components of their tax return. As soon as they provide the right info requested – normally paperwork supporting deductions and bills – the correspondence audit shall be happy.
  3. An examination audit – That is normally the product of an irregularity discovered by the Discriminant Stock Operate (DIF) system. Some audits will be dealt with over the cellphone or by means of the mail, however your purchasers could meet with an IRS agent in particular person to finalize the process.

#6: Errors equal an audit. It’s stunning to some folks to study that an incorrect tax return doesn’t mechanically set off an audit. The IRS makes use of the DIF system to match a return, together with deductions, earnings, credit and dependents, to the typical quantity of the identical classes for taxpayers who’ve comparable jobs, incomes and family conditions.

#7: The life-shattering audit. One of many largest myths about an IRS audit is that an audit will destroy your life. Typically an IRS audit will be taken care of by answering just a few questions concerning the taxpayer’s funds. Advise your purchasers to at all times take any correspondence from the IRS significantly, and remind them repeatedly to retain information and receipts to help their earnings and deductions.

#eight: Skilled tax companies can safeguard you towards an audit. The IRS doesn’t audit based mostly on who stuffed out the tax return. Many taxpayers suppose they’ll keep away from being audited in the event that they interact the help of a tax skilled. The percentages could go down since you are usually extra accustomed to the tax system, however purchasers can run into unscrupulous professionals as properly. 

Simply bear in mind: An audit isn’t the tip of the world. Be certain that your purchasers are trustworthy and that they preserve receipts and information. Lastly, ensure that your work is correct!

Editor’s be aware: For extra info, try different articles in Mike D’Avolio’s sequence on audit.

Mike D'Avolio, CPA

Mike D’Avolio, CPA (80 Posts)

Mike D’Avolio, CPA, JD, Senior Tax Analyst, has labored with ProConnect™ Lacerte® at Intuit® since 1987. He screens legislative and regulatory exercise, serves as a authorities liaison, circulates info to workers and clients, analyzes and exams software program, trains workers and clients, and serves as a public relations consultant.

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