It’s tax season again, and the IRS has acknowledged additional IRS audit red flags to be cautious of on your 2016 tax return. Many of the IRS audit targets are not handled well by off-the-shelf “turbo” software solutions, so it is best to work with the tax preparation experts at Allen Barron. We prepare taxes for individuals and businesses throughout the San Diego area and can help to protect you from mistakes that can lead to an IRS audit.
The first red flag is mileage for small business owners. The IRS is taking a closer look at the returns of LLC owners for excessive deductions including mileage and meals. If the taxpayer claims thousands of miles in their 2106 expenses the IRS will look into the nature of the business itself to see if other taxpayers in the industry have reported similar figures. Any return that falls out of the statistical bell curve for the mileage expense can expect an audit to challenge other business expenses. Home office deductions should only be taken for actual office space that is dedicated to the business. If there is workout equipment in the room or if the taxpayer deducts the square footage of a living space with a computer desk in the corner the deduction will not stand. The final audit trigger for small business professionals relates to a series of losses spanning several tax years. The IRS expects a business to turn a profit at some point, and repeated losses raise additional IRS audit red flags for deeper review of the return.
All taxpayers should resist the urge to over-inflate standard deductions. While almost all taxpayers claim donations to charity and home mortgage deductions the IRS will once again compare your income level to the bell curve statistical norms looking for those who fall outside of the average. The best rule of thumb is to ensure you have documented receipts and records for all donations including dropping off bags of clothing and household goods at your local charity’s center. Keep the slip provided by the attendant and make sure the deductions claimed through this channel are supported by written evidence. Taking a picture of the items and bags at the point of drop off is another excellent form of documentation in this area.
Finally, the IRS is particularly monitoring those who claim deductions from rental properties. Many of the expenses claimed on the IRS schedule E are to be depreciated and not deducted as a lump expense in a single year. This is a common error. Expenses that fall outside of the bell curve and significant losses for more than 1 year consecutively are additional IRS audit red flags and property owners must also carefully document these expenses and deductions.
The tax preparation, accounting and legal tax professionals at Allen Barron help to reduce the likelihood of an IRS audit by helping to ensure proper documentation is provided with the return itself and that all information contained in the return is properly formatted and structured. We invite you to contact us or call 866-631-3470 for a free consultation and to schedule an appointment with our tax preparation team. Remember, at the bottom of your tax return (even electronically submitted returns) you must “sign” your return under penalty of perjury. The IRS has significantly upgraded their internal data systems and has improved their ability to single out individual returns for review and audit.
