Now that tax season is over, audit season has arrived. Based on statistics released in the 2017 IRS Data Book, the audit rate for individual tax returns is the lowest it’s been since 2002. It’s currently 0.6 percent, or about one in every 160 returns. That rate amounted to 934,000 audited returns in 2017. But there are still common audit triggers.
The taxpayer claimed a disproportionate charitable contribution deduction.
Each year, millions of taxpayers claim the charitable contribution deduction. Even under the new tax law, many taxpayers will still be able to claim the deduction. However, your clients will run into trouble if they claimed an amount for the deduction that was too high compared to their income. The IRS has charitable deduction amounts that it deems proportionate for each income level.
The taxpayers are self-employed. Your clients who are self-employed are more likely to be selected for an audit than your clients who are not self-employed. This is because Schedule C includes so many potential deductions business owners can claim.
For example, if your clients claimed excessive deductions for things like business meals, travel, entertainment, vehicles, or showing a significant net loss, the IRS will more closely scrutinize their returns. Be sure to make your clients aware of the importance of having receipts and detailed records for all business expenses they deducted.
The taxpayer claimed the home office deduction. The home office deduction is for those who use a space in their home “exclusively and regularly for their trade or business.” The IRS is great at finding taxpayers who claimed the deduction fraudulently. It will be difficult for your clients to prove they really did qualify for the home office deduction.
The taxpayer wrote off a loss for a hobby. Your clients should have reported income for a hobby and may have qualified for some deductions, but they should not have written off a loss from a hobby. The only reason they would have been able to write off a loss is if their hobby was run like a business and they had an expectation of profit.
The taxpayer has a foreign bank account. If your clients have bank accounts outside of the U.S., they should have kept detailed records and reported it on their tax return accordingly. The IRS keeps a close eye on taxpayers who have foreign accounts, especially if it’s in a “tax haven” country. If you can, it’s best to consult clients on the implications of having a foreign bank account before they ever open one.
There are, of course, other reasons your clients may have been audited that are out of your control—if they made a lot of money, if they failed to tell you about sources of income, etc.—but by being proactive and educating your clients about the auditing process, you’ll help minimize the red flags they put up to the IRS in the future.
If you or a client need help with tax problems, call Jeffrey R. Siegel, your Kansas City Tax Attorney, at (913) 735-4829. We help with offers in compromise, levies, garnishments, installment agreements, tax delinquencies, clearing tax liens, innocent spouse relief, injured spouse relief and other solutions when you cannot pay your taxes.