How can you avoid being audited by the IRS?

 By Jeff Brooks CPA   jeff@jbrookswa.com

One of the best ways to avoid being audited by the IRS is to have a CPA tax professional who is experienced working with the IRS. 

The book Outliers: The Story of Success by Malcom Gladwell key points are

  • Hard work is critical to success, but,
  • Successful people were often lucky to be in the right place at the right time, (I have been fortunate to have worked for small, medium and large CPA firms with a large variety of different tax situations AND
  • 10,000 hours of working on skills seems to be a rule of thumb.

Question:  Have the number of IRS audits increased or decreased?

Answers: For 2010, the number of returns selected for examination increased by nearly 11 Percent over 2009. Audits of individual returns have reached the highest level in over a decade.

4.7% of individual returns reporting business income (sole proprietorships) between $ 100k and $200k were audited during 2010.

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Question: What are some of reasons that I might be audited?

Answers:  1. Repeated losses on your sole proprietorship (Schedule C),  2. Too high of a home office deduction,  3. Too high auto, travel and meals and entertainment. 4. Rounding numbers to whole dollars or miles. And 5. Cash businesses.

6. Failure to disclose a foreign bank account has increased IRS scrutiny.

 

 

Question:   What could cause my tax return to be audited by the IRS?

Answers:

  1. 1.    The return has been identified as being involved directly or indirectly in an abusive tax avoidance transaction.
  2. 2.     The “DIF” system is applied. The DIF system compares the average deductions of other taxpayers with income similar to your income. What is an example of the “DIF” system causing  your tax return to be audited?  You are too generous and donate a lot more than other taxpayers with your income level.  I got caught in this DIF system in 2007 when I donated too many dollars and goods compared to other taxpayers with my income. Ouch!   
  3. 3.    Information matching is the most common reason for IRS audits. Every year we have a few clients who do not give us all of their 1099 income documents.
  4. 4.    Unfortunately disgruntled employees may contact IRS.
  5. 5.    A bad tax preparer gets on the IRS list of prepared tax returns to be audited.
  6. 6.    Many times the IRS will audit one return from just a random sample and then audit every over tax return that has a relationship to the tax return that is being audited.

 

Question: How many years can the IRS go back and audit me?

Answers:

  1. 1.    The IRS has three years to assess an additional tax due.
  2. 2.     For example, for a taxpayer who filed a 2009 tax return on

April 15, 2010, the IRS has until April 15, 2013, to assess an

additional tax.

  1. 3.     There are  two exceptions to the three-year statute. 

A.   The statute is extended to six years in a case where the taxpayer has

omitted more than 25% of gross income.

 B.  There is no statute of limitation in cases where no return has been filed, or where the taxpayer

has filed a fraudulent return.

 

 These two exceptions permit the

IRS to assess an additional tax at any time.

 

Jeff Brooks CPA

For the firm

JBrooks Wealth Advisors, PC

Certified Public Accountant and Certified Financial Planner

 

  1. 7.       17

 

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com