IRS audit rates are historically low, according to a recent Government Accountability Office (GAO) report, but that’s little consolation if your return is among those selected to be examined. Plus, the IRS recently received additional funding in the Inflation Reduction Act to improve customer service, upgrade technology and increase audits of high-income taxpayers. But with proper preparation and planning, you should fare well.

From tax years 2010 to 2019, audit rates of individual tax returns decreased for all income levels, according to the GAO. On average, the audit rate for all returns decreased from 0.9% to 0.25%. IRS officials attribute this to reduced staffing as a result of decreased funding. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, all types of audits are being conducted less frequently than they were a decade ago.

There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, the best way to survive an IRS audit is to prepare in advance. On an ongoing basis you should systematically maintain documentation — invoices, bills, cancelled checks, receipts, or other proof — for all items to be reported on your tax returns. Keep all records in one place.

Audit targets

It also helps to know what might catch the attention of the IRS. Certain types of tax-return entries are known to involve inaccuracies so they may lead to an audit. Here are a few examples:

• Significant inconsistencies between tax returns filed in the past and your most current return,
• Gross profit margin or expenses markedly different from those of other businesses in your industry, and
• Miscalculated or unusually high deductions.

Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them — for example, auto and travel expense deductions. In addition, an owner-employee’s salary that’s much higher or lower than those at similar companies in his or her location may catch the IRS’s eye, especially if the business is structured as a corporation.

If you receive a letter

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS doesn’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

Many audits simply request that you mail in documentation to support certain deductions you’ve claimed. Only the strictest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email or text messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)

The tax agency doesn’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. Collect and organize all relevant income and expense records. If anything is missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If you’re audited, our firm can help you:

• Understand what the IRS is disputing (it’s not always clear),
• Gather the specific documents and information needed, and
• Respond to the auditor’s inquiries in the most effective manner.

The IRS normally has three years within which to conduct an audit, and an audit probably won’t begin until a year or more after you file a return. Don’t panic if the IRS contacts you. Many audits are routine. By taking a meticulous, proactive approach to tracking, documenting and filing your company’s tax-related information, you’ll make an audit less painful and even decrease the chances you’ll be chosen in the first place.

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Individuals can view the complete tax planning document  here, and businesses can find the information they need here. If you have any questions on how to file your return this year, please contact Burkett Burkett & Burkett Certified Public Accountants, P.A. It’s our job to know the most important tax changes and help you to understand how they affect you or your business.

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Each quarter brings new and complex changes to tax codes and regulations. Here are some changes for Quarter 3 that you need to be aware of:

• In August, the IRS proposed regulations that would close estate and gift tax loopholes commonly used to lower the taxable value of their transferred assets and minimize the burden of estate of gift tax. The proposed regulations will effectively increase the tax required by business and estate owners in their lifetime.

• A limited liability company (LLC) affected by Bernie Madoff’s Ponzi scheme was able to claim a theft loss deduction. It was determined that the losses could be deducted as long as they are not covered by insurance or otherwise.

• Pension plan payouts, typically a “cash or annuity” choice, can now be done as a combination of a lump sum, with the remainder split over lifetime monthly payments.

• A new self-certification process is in place for individuals who miss the 60-day time limit for rolling over retirement funds into an IRA or separate retirement plan.

• Residence interest limits will now be applied on a per-individual basis, rather than a per-residence basis for unmarried co-owners.

• Research tax credit is not available for computer software that is developed by or for the benefit of the taxpayer primarily for its internal use unless it meets a “high threshold of innovation test”, meaning that it is innovative, involves significant economic risk, and it is not commercially available for use by the taxpayer.

• For tax years beginning after Dec. 31, 2017, new regulations are in place for how to elect new partnership audit rules.

• Employers may now pay a per-diem amount to an employee on business travel instead of a reimbursement for actual expenses. There was a raise in the uniform rate for high-cost and low-cost areas in the continental US that have been raised. High-cost area per-diem is raised $7 to $282, and the low-cost area per-diem increases $4 to $189.

Call Burkett Burkett & Burkett, Certified Public Accountants, P.A. with any questions you may have or for assistance navigating these changes. Read the full article here.

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