By Scott F. Berger
Typically, less than 1 percent of all tax returns will be audited by the IRS. Due to budget cuts, the audit rate is expected to drop even lower. But if you think that means you or your company are in the clear, think again.
The following are some areas to be aware of, which may increase your risk of an IRS audit:
1. Math mistakes
Did you check the numbers? Many returns that are selected for an audit are picked because they contain simple math errors. If you are filling out your own return, make sure that all the columns add up.
2. Having a higher income threshold
The higher your income, the more likely it is that you’ll be selected for an audit. Individuals with incomes above $200,000 have an audit rate around 2.71 percent – much higher than the average. If you’re a high-income earner, it is especially important to make sure you have your ducks in a row before you file your taxes.
3. Operating a cash-intensive small business
Do you own a small business? Small businesses, especially those that handle a lot of cash, such as bars and restaurants, are more likely to get a second look from the IRS because they are sometimes found to under-report income. Other actions that might catch the attention of the IRS include claiming the home office deduction or over-estimating your business expenses.
4. Overestimating donations
How much are your donations really worth? The IRS encourages donations to charity, but they’re paying attention to the value of the items you donate. Because many individuals value the items themselves, there’s a potential to over-value and over-report donations.
If you’re donating items worth more than $5,000, you are required to have a professional appraisal before you make the donation. And if you are making non-cash donations above $500, you need to file Form 8283.
5. Deducting business expenses
If you’re going to deduct the money spent on dinner, a business trip or entertainment, you better be able to prove they served a business purpose. The IRS pays attention to big-budget travel and meal deductions and requires detailed records documenting everything from the amount spent and the place to the attendees, business purpose and the nature of the discussion. Retain this information if you plan to claim deductions for these items.
Many times, IRS audits are unavoidable and occur without any wrong-doing on the part of the taxpayer. Being prepared for an audit means being thorough with your procedures and double-checking the information on your tax return for accuracy. If you have questions about your tax return, contact me or another member of Kaufman Rossin’s tax team.
Scott F. Berger, CPA, is a tax and entrepreneurial services principal in Kaufman Rossin’s Boca Raton office. Kaufman Rossin is one of the top CPA firms in the U.S. Scott can be reached at firstname.lastname@example.org.