IRS Audit Risks

  • This topic is empty.
Viewing 15 posts - 1 through 15 (of 36 total)
  • Author
    Posts
  • #606682
    Anonymous
    Inactive

    Over the holidays I have taken the time to catch up on reading the various tax newsletters I subscribe to. One of them states that the IRS’s clear number one audit priority will be to examine the returns of individuals who operate sole proprietorships and file Schedule C with their tax returns.

    The reason given for this is that IRS research shows that sole proprietors underpay their taxes far more than any other group. The service clearly believes that there are substantial tax dollars to be recouped from auditing this group more heavily than previous years. Those showing losses face more scrutiny.

    What this means is that it is important to have your financial house in order when preparing your returns. All of your expenses need to be fully documented. An examination of a business loss can quickly become an examination of your whole return. From personal experience, I know how the service feels about the gambling industry and it is not pretty.

    For those of you who operate as corporations, zero salaries for owners/executives is an audit red flag for S-Corporations. For C-Corporations salaries that vary annually in order to consume all of the corporate profits is a red flag as well.

    #757683
    supervince
    Member

    I get nervous about this every year at tax time. I try to document all my expenses the best I can but sometimes I am unsure how to file certain types of expenses so I just use my best guess. I think I should hire an accountant to start doing this for me.

    #757685
    Anonymous
    Inactive

    I think so too. When it comes to taxes, cross your Ts and dot your Is. I was audited over 20 years ago, and because of bad documentation I ended up paying money I really didn’t owe and could ill afford. It plunged me into poverty for two years. Ramen noodles in a cup, franks, beans and apples from the apple tree get old quickly.

    I learned my lesson!

    #757693
    Anonymous
    Inactive

    Documentation is key. I went thru an audit this year with a client in the gambling business. Most of his transactions were in cash and records were not kept for obvious reasons. He is an honest guy – the only kind of client I accept. He reported all of his income. The IRS accepted his income number and only gave him 25% of his expenses, even for those for which he had proof – like his checks to me for preparing his taxes.

    On appeal, they showed previous tax cases that had been ruled in their favor and said “take us to court”. Going to tax court is not cheap and with the likely outcome not being much better, my client was forced to take their offer. Had he been able to document his cash outlays, he would probably received a different result as these records were asked for and not delivered. We might have been able to settle his case more favorably without going to the appeal level.

    Bottom line. Document your expenses as you incur them and keep good records.

    #757723
    Anonymous
    Inactive

    Steve S is a good guy, and I can vouch for his tax related advice. Good to see you posting here, Steve.

    #757725
    lois1975
    Member

    all sounds very complicated – are you all American?

    #757726
    Anonymous
    Inactive

    Randy:

    Thanks for the plug. My guess in now lunch is on me next time?

    #757727
    Anonymous
    Inactive

    BallsUp:

    Yes we are all Americans. This thread applies to US citizens and others doing business in the US. My apologies for not making that clear.

    #757743
    lois1975
    Member

    @Steve S 149613 wrote:

    BallsUp:

    Yes we are all Americans. This thread applies to US citizens and others doing business in the US. My apologies for not making that clear.

    Oh dont apologise hun :) Just did my first tax return this year – (only started my web page September 2006) and got a rebate , dreading next years tho lol

    #757749
    Anonymous
    Inactive

    Just a few words of advise:
    1) in 1993 I got audited and ended up owing a few thousand. At that time I was paying a tax man $600 to do my taxes.
    2) I read that computer tax returns were not audited that much (I’ve read that several times over the years) and since that time I’ve used Turbo Tax. This year’s tax return will be done once again by Turbo Tax. Cost at Office Depot is $77+
    It’s worth it. I keep my books update on a daily basis with QuickBooks which can be transfered to Turbo Tax at the end of the year. I own several rentals.
    I get my tax returns done in 20 minutes and my tax refund in February.

    #757756
    Anonymous
    Inactive

    bleuze:

    I don’t know anything about your personal situation, so I cannot comment on it. However it has been my personal experience that in most cases in which an audit results in additional taxes assessed, it is usually not caused by an incorrect application of the tax law by a competent CPA. It most often occurs because:

    1. Insufficient documentation of expenses.

    2. Failure to disclose all income. Many times clients “forget” to tell me about that jackpot they hit in Vegas and the 1099 the casino gave them, for example.

    3. Failure on the part of the preparer to fully understand the client and ask enough questions.

    4. Failure on the part of the client to provide complete and truthful answers to preparers questions.

    5. They client represented themselves in the audit.

    Be wary of those who claim to know how the IRS selects returns for audit. I have been to many seminars and no one really knows. However, having said that, computer programs remove math errors. Math errors in a return are going to attract more scrutiny.

    TurboTax is a good program. And, for most people, using it is just fine. I used to use it myself (the professional version). It seems every year I have to buy the individual version as someone wants me to review what they have typed into TurbTax. However, there a few instances in which having a CPA knowledgeable in your industry can provide a better result than an inexpensive generic tax program.

    I prepare a lot of returns for landlords, house flippers and rehabbers. Having worked in the real estate industry for 11 years, including 6 as the CFO/Controller of a property management company before I opened my own practice, I am fairly certain that a competent CPA with a good knowledge of real estate would have been able to provide you a better result tax wise as opposed to TurboTax.

    Last, unless you like the idea of forced savings, and don’t get me wrong a lot of people like getting their refunds, the goal I shoot for when planning for clients is to owe very little or get back very little. That way, you have the use of your money all year long instead of it being in the hands of the govt. They are not going to pay you interest unless they make a mistake in processing your return.

    #757758
    Anonymous
    Inactive

    Steve,

    You’re correct in many respects. However, I’m going to say the following to US tax payors:
    1) generally when they audit one year, they audit 2 to 3 years
    2) generally they audit the past returns until they get to the present tax returns
    3) this is not legal, but neither is online gambling funding or site: remember, the government is out to put you out of business and if you like to give the government money that they are NOT entitled to (read your affilate/gambling terms) and help them put you out of business, then by all means give them your affilate/gambling money!

    #757763
    Anonymous
    Inactive

    Richard:

    Are you a CPA or Tax Attorney? Most audits I have been involved in have not spread beyond one year. Some have, to be sure. However, it has almost always been the result of bad recordkeeping.

    There are instances where it is legal for the IRS to extend the audit. It is up to the taxpayer or his/her representative to make sure that the service follows the rules.

    From what basis are you making these claims?

    #757764
    Anonymous
    Inactive

    Steve,

    That’s not what I meant to say. I do not know anyone who has been audited for several years at one time. They usually, at least in the past,
    audit you for 1 year, and then the next year they audit you again, etc.
    Example:
    taxes get audited for 2001 in 2004
    taxes get audited for 2002 in 2005
    taxes get audited for 2003 in 2006
    etc.

    #757768
    Anonymous
    Inactive

    I got audited for several years at one time. 3 years to be exact. They ended up only finding the missing documentation in the last year and that one year is what did me in. But once they had seen that, they did the two preceeding years for good measure. Wasted their time though.

Viewing 15 posts - 1 through 15 (of 36 total)