By Mandy Cao
For Northwest Asian Weekly
The nightmare of any individual or business owner is getting audited by the Internal Revenue Services (IRS) or by any other governmental agencies.
The chances of becoming a target for such audits are not entirely random. Your level of income, the type of business you are running, the way your business is registered, the level of itemized deductions, and the consistency between your present and previous years’ tax filings all have an impact on the probability of you getting audited.
Knowledge of these trigger points from an experienced tax adviser can help you to significantly improve your odds against being targeted.
The following are recommendations and highlights of issues that do have an impact on your vulnerability to become an audit target:
— When you select to itemize your deductions, the level of your deductions must be reasonable and in line with your previous years’ filings.
— Increasing income over the years increases your risk of being audited. Make sure that all of the expenses you claim are accurate and supported by proper documentation. This will greatly facilitate a possible audit. The same applies if you report complex investment transactions and unusual business expenses.
— Cash businesses and businesses that receive tips are often targets.
— Ironically, businesses with ongoing losses also become audit targets. The authorities are concerned that individuals are claiming their “hobbies” as a business.
— Those that are self-employed, contractors and owners of sole proprietorships, are also known to be audited more frequently than incorporated businesses.
— In recent years, the IRS is focusing on contributions to nonprofit organizations. Check with your tax adviser on whether your deductions are within the acceptable limits.
— One of the major trigger points is the submission of a tax return that is not properly filled in, contains mathematical errors, and does not include the necessary supporting documentations.
Report all Income
Be reminded that bank transactions, mortgage payments, and income reported on W2s or 1099 forms must be submitted by the payee to the tax authorities. This information is collected in their database and automatically compared with the information you are submitting. Any data that does not match will automatically trigger an investigation by the IRS.
Support your claim with documentation
Initial tax inquires by the IRS can often be resolved if you are able to submit documentation to prove the validity of a claim that is challenged by the IRS.
Major flags in your deductions
Start-up costs are high target items for tax auditors to look into. Don’t be tempted to overstate values on old tools, office furniture, and equipment to create depreciation expenses for the new company.
Whether you select actual car expense or mileage car claims, you must have proper supporting documents for your expenses or a daily updated car log. Otherwise, you will not be able to support the validity of the miles driven for business.
In this connection, be reminded that miles driven for commuting to and from your place of business are not tax deductible.
If you claim part of your home as a business office, make sure that you read the rules and regulations. It is indeed difficult to meet all the legal requirements the IRS has set for meeting their criteria to qualify for a home office deduction.
Meet your deadlines
Avoid interest, penalties, and overall exposure with all governmental agencies by meeting the deadlines. File in time, and avoiding extensions whenever possible.
Not knowing the law is no excuse
Don’t wait until you are faced with the painful reality that your tax filings are not in order. Do what you are doing best is an old saying that has always proven to be right for ambitious individuals and entrepreneurs alike. Leave your problems and worries that are not your strength to a person that understands your situation and is specialized. Choose someone experienced in assisting people in their pursuit to maximize the productivity and profitability of their business. ♦
Mandy Cao is an IRS enrolled agent and a certified accounting specialist. She is the owner of YMC Tax & Accounting Corp. Her company’s staff members speak English and Chinese.
She can be reached at email@example.com.