KEEP a low audit profile. It reduces risk of an audit.
Here are some tips to keep the IRS from auditing your tax returns:
• Make sure that social security numbers and names that you use on your income tax match exactly what appear on your social security cards. An incorrect number or name causes your electronic filing to be rejected.
• Do not just fill in your changed name carelessly. Mismatch information between IRS and Social Security Administration records could generate IRS notice. If you just recently married include your maiden name in the first year of filing a joint return to avoid receiving an IRS notice.
• Check your occupation. A professional who takes a study leave and fills in student as an occupation could raise doubt why employee business expenses is in a student’s return.
• Report ALL 1099 income. This is a major cause of IRS notices. Paying $1,000 in additional taxes and interest for failure to report a $100 income does not make sense. Sure it happens.
• Report mortgage interests covered by Form 1098s on line 10 of schedule A itemized deductions. Report all others owner-carried mortgages on line 11. This is important because IRS matches mortgage interests reported by banks with Form 1098 against line 10 of your tax returns. A mismatch generates an IRS letter.
• The same is true with K-1s from LLCs, S-corporations, and partnerships. Double-check your entries from K-1s to your tax returns. IRS matches K-1s reported by partnerships with schedule E of your tax returns.
• File your returns on time. Extensions are fine. It extends the Statute of Limitations during which they can audit you. But prolongs your agony.
• Gather your documents and file your return early to avoid common mistakes that could have been avoided.
• Use IRS-approved software and forms. The use of unauthorized forms from tax software that have not received IRS approval causes IRS personnel to pull out your return to manually transfer data to approved forms.
• Do not automatically amend your previous returns at the sight of an error or claim for a refund. Evaluate claiming a refund versus getting an IRS notice. A 1040X may cause your original return to be pulled out from storage for a closer look. And an audit.
• Depreciation schedule Form 4562 asks if you have evidence to support business mileage on your car and if your evidence is in writing. A NO answer invites an audit.
• Make-believe Schedule Cs income from business or profession, the days of reporting $500 of income and deducting $5,000 of expenses are over. Don’t do it.
• Rental Properties:
Starting in 2016, Notice 2015-82 increased to $2,500 de minimis safe harbor limit from $500 under repair regulations for tax payers without applicable financial statements AFS. A policy must be in place beginning January 1, 2017 for use of safe harbor with per-item deduction limit costing $2,500 or less.
A. Avoid large deductions. IRS agents are always looking for amounts that should be capitalized. You need to break down a $3,000 repairs into $948 electrical, $1,216 plumbing, $836 roofing.
B. Avoid those round solid numbers. Use $956 for carpets, not $1,000.
C. Never claim large travel expenses for rental purposes. If you insist, attach receipts and a good explanation.
D. If your address is identical to your rental address, allocate non-deductible portion for owner-occupied space. If you don’t, you could receive a letter that starts with “Your income tax return has been chosen for audit…..
In accordance with IRS Circular 230, this communication is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.
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Sy Al-os Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.
