IRS audit missteps

Don't get tripped up by surprises

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Rick Schultz, CPA

You open your mailbox and there it is. Correspondence from the IRS saying they’re taking a closer look at your tax return. The thought of an audit is unsettling to most and even more nerve wracking when surprises pop up throughout the process. The last thing you want is to be caught off guard by the IRS.

This looks like a job for the professionals. I recommend that you don’t handle an audit yourself. Get a professional to do it. Call your CPA, attorney or whoever you trust to handle this for you. The time and angst you save will far outweigh the cost.

IRS agents are people, too. I think this comes as a surprise to many people. IRS agents are not out to get you. They’re just doing their jobs. If you keep that in mind, they will treat you as nice or as bad as you treat them.

The IRS already has your information. The IRS has a copy of your W-2, 1099s, etc. – they even know if you have insurance coverage. They can check your Social Security number and the Social Security numbers of all your dependents. So, don’t leave anything off your return because they probably already know about it! For example, you drive for Uber. You may say, “Oh, I only did it a couple of times, but it wasn’t a big deal so I’m not going to report it.” The IRS knows if you drove for Uber because Uber sends them a report.

You can’t use estimates. This is another one that surprises taxpayers. There is no “let’s just use the average for my income, or just put however much the IRS will allow.” The IRS requires actual numbers with support. The biggest estimate issues I see are with non-cash donations. Everybody gives Goodwill $500 in household items every year. You need receipts to prove that and you also need support for how you came up with that $500 estimate. Having documentation is extremely important for every number on your return! Estimates also tend to be round numbers. Too many round numbers looks weird and may trigger an audit.

TMI. When you’re talking to the IRS, don’t disclose too much. Answer their questions but don’t expand on them, don’t give examples and don’t start telling stories. For one, the agents don’t care and you might also slip up and say something you shouldn’t have.

Document, document, document! One thing the IRS likes to see is receipts for all your donations. If you’re deducting mileage for auto, charitable or medical purpose, they’re going to want to see a log showing where you went and how many miles you traveled. This needs to add up to what you deducted.

If you don’t have documentation to support your deductions, the IRS could end up disallowing them. Remember the IRS already has most of your income because it comes through on other forms from your employer or your customers. They will spend most of their time looking at your deductions.

Schedule C. This is an area the IRS is very hot on these days – particularly when it comes to home businesses. If your business doesn’t make money, the IRS is looking at calling it a hobby and hobby losses are not deductible. You must be engaged in the activity for a profit and run it like a business. If you do it for enjoyment or another reason, you’re not running a business. For example, if you’re breeding dogs and you haven’t sold a dog in three years, you’re probably not running a business.

Itemized deductions. With itemized deductions, the IRS is going to look to see if you have figures higher than your reported income can support. If your charitable donations or your mortgage interest is too high based on what they’re seeing on page one of your reported income, they’re going to want to know where the money came from.

If you are audited and the IRS disallows any deductions, you’re going to end up owing taxes. Depending upon how big the disallowance is, they could charge you with penalties. (They’ll most surely charge interest.) Your best route is to contact your professional tax advisor if you receive an audit notice.

Rick Schultz, CPA, Partner, specializes in individual and partnership, real estate and small business tax planning, preparation, compliance and consulting. He can be reached at (480) 483-1170 or RickS@hhcpa.com.