Author: Michelle Chacon

Michelle Chacon is an Executive Assistant and Registered Tax Preparer.
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What to Expect from an IRS Audit

What every taxpayer should know regarding types of IRS audits and common issues that can trigger audit.

An audit is an investigation into a tax return of an individual, business, estate or trust.  The IRS uses this process to determine if the information provided in the tax return is correct. This article discusses three types of audits and several common audit triggers.

Types of IRS Audits

Correspondence Audit

This is the most common type of audit and also the easiest in terms of what is required and the length of time involved.  Usually the IRS will send a request for supporting documentation to prove deductions, exemptions, proof of dependents, proof of charitable donations or other documentation to corroborate a specific part of the return.  This is the least stressful form of audit for the taxpayer and usually sending in the requested paperwork is enough to satisfy the IRS.   It is strongly advised that you seek the help of an experienced tax attorney to prepare your reply to the IRS correspondence audit and to ensure the documentation you send is exactly what is needed.  As long as a response is made within the timeframe and the documentation enclosed satisfies the proof needed by the IRS, the audit is complete.  This type of audit is most commonly utilized for individual tax returns, where there are perhaps one or two simple issues the IRS wants you to substantiate.

 Office Audit

An invitation to appear at an IRS office to conduct an office audit is a serious matter.  It is important you do not attend the office audit without your tax attorney.  Being asked to an office audit means the IRS is counting on the possibility that you owe additional taxes.  It is essential that you seek the advice of an experienced tax attorney to accompany you to the IRS office audit to protect your rights and to use their knowledge and experience to assist you in finding ways to reduce or eliminate any additional taxes.

Field Audit

A field audit is the most serious form of audit and involves an IRS Auditor coming to your place of business to thoroughly audit your records.  If the IRS finds that your business has inaccurately reported income and evaded paying the correct tax, the consequences could result in heavy penalties, additional taxes and possible prison time.  It is of utmost importance to engage the services of an experienced tax attorney to be present while the IRS auditor is at your place of business.

Below is a summary of common audit triggers

Large amount of charitable donations

The IRS looks closely at the receipts and proof of your charitable donations.  If your charitable donations are more than 3% of your income, the IRS will scrutinize your documentation.  Make sure you have receipts, cancelled checks, and appraisals for all donations to substantiate your claim for deductions.

Failing to report part of your income

The IRS already knows what is on your W-2 and 1099s in terms of income.  If you do not report your income accurately on your tax return, this will likely trigger an audit.  You will receive a W-2 from your full-time job, but may also receive 1099s for freelance work you do on the side, as well as other forms of miscellaneous income, in all cases you must report all of your income from all sources.

Large losses on Schedule C, or many years of losses on Schedule C

If you are self-employed, and report your income on a Schedule C, you will report either a profit or a loss.  If your return shows a very large business loss on a Schedule C, or if you have a history of several years of losses on your Schedule C, this will likely attract IRS attention.

The reason behind this is that the IRS likes to see a profit at least two out of five years to consider a business legitimate.  If there are five years of losses reported on a Schedule C, the IRS will likely audit to see if ‘hobby’ would be a better description.  This is important because taxpayers are required to report any income earned from a hobby, but tax payers generally cannot deduct losses.

For example, a Professional Photographer with his own business, clients, advertisements, portfolio etc., can claim as a business expense the purchase of a camera.  Whereas, a doctor who enjoys taking photographs during his weekend hikes cannot claim a new camera as a business expense.

Claiming too many business expenses

In addition to the business/hobby issue just discussed, reporting too many losses can also cause the IRS to question how your business is staying solvent.  If you report many personal expenses through your business without it being a true necessary business expense (in order for your net profit to decrease and therefore your tax liability to decrease) the IRS will scrutinize your records during an audit.

Random Selection

Unfortunately, even if you do everything right, there is always a small (less than 1%) chance that your return will be randomly selected for an audit.

In Conclusion

If you do receive an audit notice from the IRS, it does not need to be the start of a stressful and difficult time for you and your family, or your business.  You will likely benefit from an experienced tax attorney’s advice and direction with the protection of the attorney client privilege.

1040 Tax Form

Tax Season is Here – The Advantages of Hiring a Professional Tax Preparer

The Advantages of Hiring a Professional Tax Preparer

Even the words ‘Tax Season’ can be enough to give anyone a headache!  Fortunately, you do not need to face tax season alone.  Hiring a tax professional can be invaluable to you especially if your situation has recently changed or is complex.

Federal tax law is adjusted every year, making it difficult for an average taxpayer to keep up to date with all the changes, and to understand how to apply these changes to their own tax situation.

A professional tax preparer works hard to keep up to date with all adjustments to tax law, both federal and state, making it advantageous to the taxpayer to hire someone with such an accurate knowledge base.

Deductions and Credits

With extensive knowledge and experience, a professional tax preparer will be able to assist you in finding little known deductions or credits, that you may be unaware you qualify for.

Where you may be eligible for several deductions and/or credits, and yet only be allowed to use one, your tax preparer will have the knowledge to accurately calculate which deduction and/or credit would be the best choice to minimize your tax liability.

IRS Audit

Facing an IRS audit alone can be tremendously difficult and stressful.  If you are audited, it might be tempting to answer the IRS yourself. It is strongly recommended that even the initial response to an IRS audit inquiry come from a tax attorney.

You can communicate confidentially with a tax attorney before the response to the IRS is prepared to give you the best chance of a “no change” letter from the IRS at the conclusion of the audit.

Filing Status

Did you get married or divorced in the past year?  Did you have a child?  Adopt?  Or have you recently lost your spouse?  These changes in situation can dramatically change your filing status and exemptions, deductions and credits you may be entitled to.

If you are a widow(er) your status may change not only for the year in which you lost your spouse, but for a specific time period after.  Determining the best and most tax advantageous filing status takes special knowledge of tax law and time-sensitive dates.

Your professional tax preparer would be able to determine the best way forward.

Child in College?

Is your child in college?  Your tax preparer can assist you in determining how to claim your child under the age of 24, if they are still in full-time education.

Determining how to properly claim older children, especially if they have income either in the form of wages or investment income, requires in-depth knowledge of ever-changing tax law.

Real Estate

If you have bought or sold any real estate, or have invested in rental property, a tax professional can assist you to make the most of the credits and interest deductions available to you.

If your home or property has been affected by a fire, flood, earthquake or other natural disaster, your tax preparer can assist you to take advantage of relief provisions and elections with regard to replacement property and any gain or loss incurred.

Starting a New Business

Starting a new business is an exciting time for anyone, however there are tax implications that can be difficult to understand.  A tax preparer will help you navigate the complex world of business deductions, expenses, insurances, how to properly report your income, accurately calculate self-employment tax and paying estimated taxes.

If you have started a new business, large or small, it would be wise to seek professional tax advice and assistance in preparing your taxes to ensure accuracy and to take advantage of your tax preparer’s knowledge to utilize all allowable deductions and credits to minimize your tax liability.

Summary

Indeed, hiring a Professional Tax Preparer to prepare and file your taxes, will ease the stress and burden of tax season, and leave you with peace of mind and confidence in your financial future.