Although we are still in the middle of tax season, there are things you need to be aware of when filing your tax returns. First, make sure you find a reputable company that can prepare the returns correctly like Packey Law Corporation. Make sure you consider the likelihood of a tax audit and how to take steps to reduce the probability of being audited. Here are common reasons why the IRS will audit your tax returns:
- Not reporting all taxable income. This is a common error whether intentional or not. W-2s and 1099 filings are required for all businesses who have employees, sub-contractors, or distributions of funds. This information is reported to the IRS, EDD, and Social Security Administration office. If you do not report income on your tax return that was reported to the agency, your tax return may be audited.
- Taking Higher than average deductions. Most people have deductions they can take on their tax return. If those deductions fall below the standard deduction, then the standard deduction is all you can take for the deduction. However, some people have over the standard amount whether it is medical expenses that use up a certain percentage of your yearly gross income, or moving expenses, or job searching expenses, the IRS may audit your return. If your deductions are higher than the standard deduction, be sure and keep your receipts to verify those expenses otherwise you may not be able to take the deduction. Also, taking large charitable deductions may cause a tax audit as well. Do you have receipts reflecting your donations?
- Writing off a loss for a hobby. There are special guidelines for a hobby that generates income such as wood working, art, and other hobby like interests. A hobby is just that, a hobby. Typically, a person cannot write off hobby expenses. Seek a professional tax preparer to learn the guidelines of the amount of yearly income from hobby sales and expenses that would place the hobby interests into a profit small business.
- Deducting Business Meals, Travel and Entertainment. There is only a certain amount a business can deduct for this expense category. Consider whether the travel expense should be a separate expense. Also consider if the meals are used for taking client’s out to discuss business over a lunch and what proof can you provide if you do get audited. Consult with a tax professional.
- Claiming 100% business use for a vehicle. This is a common mistake taxpayers make that cause an audit. There are certain vehicles that can be classified as 100% business use such as some utility trucks. However, most other vehicles are used a portion of the time for personal use. Since the typical person works 40 hours a week or 5 days a week, their off time is often times going to need the use of the vehicle. Consult with a tax attorney to determine how much business use is acceptable.
- Failing to report foreign bank accounts. IRS has been cracking down on foreign bank accounts and international funds. Being honest on your tax return will help reduce an audit. If you are dealing with international funds, consult with a tax attorney since a tax audit is likely.
- Claiming rental losses. Unless your rental property was vacant, a rental loss is understandable. Be prepared to show proof that it was vacant. However, if your rental property was rented, but there were multiple damage repairs, pest spraying, etc, a minimal loss may not warrant an audit. Be prepared to provide proof of these expenses if you do incur a rental loss. However, the following year should reflect some profit. Consistent losses is likely to trigger a tax audit.
- Claiming home office deduction. A good tax preparer will help you determine the appropriate amount of footage you are allowed to take and percentage of utility costs.
So if we have learned anything from this, we have learned that receipts are proof. Consulting with a tax attorney should be high priority if you do get audited. An audit can be stressful, but with Packey Law Corporation, we try to reduce the changes of you being audited by advising clients throughout the year of proper tax planning for our tax preparation and bookkeeping clients. If you do get audited, we can help with that too. Stay consistent with your tax returns, unless something new arises such as a new home purchase, stocks, marriage, children, etc. Dramatic changes in your tax returns can trigger an audit review.
Packey Law Corporation represents clients in tax preparation, business and personal tax consulting, tax compliance matters, tax resolution, tax audits, and represent clients against the IRS before the US Tax Court. Our office specializes in small to medium size businesses also offering bookkeeping and payroll services. We can represent any client in the United States for IRS tax matters. We also represent clients against the California Franchise Tax Board (FTB), Employment Development Department (EDD), and Board of Equalization (BOE). Our office is located in Sacramento, California representing majority of our clients in Sacramento and surrounding counties.