By James Hooban
Tax season is upon us again. As we prepare our returns, we want to be sure that we take best advantage of deductions we can legally claim and report our income as accurately as possible. The possibility of audit looms over us and is an experience we would like to avoid. The IRS indicates fewer than one percent of 2013 returns will be audited, but certain information will increase the chances. For instance, returns declaring more than $200,000 are about four times as likely to be audited and returns declaring more than $1 million are over ten times as likely to be audited than the average. Here are some areas that may be likely to increase attention paid by the IRS by its auditors, and through technological means:
1. IRS technology is very adept at connecting taxpayer identification numbers (TINs) on forms W2 and 1099 and matching them up with TINs shown on returns. They will inevitably connect with you about any such information you did not report. You may receive a letter indicating the omission, or be subject to a personal audit. Either way, penalties for late reporting are possible.
2. Be careful as you declare charitable contributions. Keep receipts and avoid “creative writing.” Remember that you are not allowed to deduct for time you volunteer supporting charitable causes, but you can deduct for miles driven on their behalf.
3. Big deductions for meals, travel, and entertainment will alert the IRS. These expenses must be supported with receipts and records of the business purpose of the deduction along with the names of people you entertained.
4. Claiming one hundred percent business use of an automobile will attract IRS attention. If you have a vehicle used solely in your business, be sure you have mileage and travel logs that substantiate
your assertion of the vehicle’s business use.
5. Alimony is deductible for the payer and taxable for the receiver. To qualify as alimony, it must be required by a formal legal document, such as a decree of divorce or other related documents that specifically
stipulate alimony payments.
6. If you have one, do not neglect to report a foreign bank account. The penalties for failure to declare foreign bank accounts can be harsh. Maximum penalties could be as much as a $25,000 fine and
five years imprisonment for each account not declared. With any of these items, higher than average deductions are likely to raise audit alerts. Some tax preparation software provides summary comparison of individual deductions with averages for the income declared on the return. In each and every case, if you have documentation for legitimate deductions, they should be declared. If you do not have documentation you should be very careful. Finally, if you have questions or concerns, engage with a tax professional. They will guide and advise with specific reference to your situation. It is in their interest (as well as yours) that they keep you straight and compliant and minimize the chance that they will need to accompany you through any audit process.