There are certain pieces of mail that no one wants to see in their mailbox, and I’m not just talking about the usual electric bill. Notices of jury duty, legal matters, and one of the most dreaded pieces of certified mail? Notice of an IRS audit.
Who is the IRS Auditing?
Here’s the good news – the IRS audits less than 1% of all tax returns , and that number has dropped due to years of repeated budget cuts. The IRS has to bring dollars in, even with fewer IRS agents employed to conduct these audits. So, what’s the answer? According to an article in Bloomberg News, the plan is to target high-net-worth situations and “squeeze more dollars out of each audit.”
By the Numbers
Let’s take a closer look at who the IRS is interested in auditing. In 2016, there were 196 million tax returns filed, and 1.1 million of those were audited (about 0.5%). Nearly 71% of those audits were conducted via correspondence, while the remaining audits were conducted in-person by a field agent. If a return had zero adjusted gross income reported, there was about a 2.5% chance it was audited. Returns reporting adjusted gross income of $1 to $500,000 had less than 1% chance of being audited. Nearly 15% of returns reporting adjusted gross income of over $10,000,000 were audited. Oddly enough, of the 1.1 million returns that were audited, close to 34,000 resulted in additional refunds totaling more than $6 billion.
If you are an affluent taxpayer and/or a taxpayer that typically has complex tax situations and returns, substantial charitable contributions, or hobby losses, it would be a good idea to have all of your detailed documentation in order in case you receive a notice in the mail questioning a deduction. Showing proof of your credit if you can, you will most likely have a better chance of the IRS moving on to the next questionable return. If you can’t provide those documents, you may want to contact a tax professional after receiving the audit notice.
Minimize Your Chances of an IRS Audit
There are some steps you can take to minimize your chances of an IRS audit. Transposing numbers on your tax return or making errors in your math could potentially lead to you receiving a letter in the mail from the IRS. Before you file your return, go back over your inputs for a double-check. This will take a little bit of time (or a lot, depending on the complexity of your situation), but could save you hours of time and frustration that comes along with an audit.
If You Do Get Audited
Most audits, while time-consuming, are relatively painless and straightforward. A field agent will rarely show up at your door. With most audits, mailing in your supporting documents to the IRS can resolve the issue. Make sure you keep detailed, itemized records of any charitable donations you make. Don’t under-report or fail to report any income you get. If you’re doing any work as an independent contractor, make sure you report all of your income from your 1099-MISC.
Don’t Mix Up Your Personal and Business Expenses
If self-employed, make sure you don’t mix up your personal expenses and your business expenses to reduce your income. There’s a fine line between a legitimate business expense and an unnecessary business expense. Last year, the Tax Cuts and Jobs Act made significant changes in this area. For example, the deduction for entertainment expenses has been eliminated. You can still deduct 50% of your meal expenses, provided you were present at the meal, and the expenses weren’t extravagant. To avoid an audit, or lower the chance of an audit, save an itemized receipt from that meal. The IRS has not defined “extravagant,” but for further reading, they did make this notice available: https://www.irs.gov/pub/irs-drop/n-18-76.pdf
Educate Yourself and Get Help
If audited, it could benefit you to reach out to an attorney, or an accountant, and familiarize yourself with the parts of the tax law that are relevant to your situation. In the vast majority of cases, you will end up having to pay additional tax. Be honest, up-front, and courteous with anyone you are dealing with at the IRS to minimize a hassle.
While an audit can be frustrating, it’s not the end of the world. Working with a team of knowledgeable professionals can make all the difference in easing the burden of an IRS audit. Our team of CPAs and financial planners can help make sense of your tax situation whether you’re being audited or not.
Forward-Looking Tax Planning
One area our CPAs specialize in is forward-looking tax planning. Forward-looking tax planning takes into account your investments, Social Security, and other essential factors in your financial life to potentially minimize that amount of taxes you pay over your lifetime.
If a forward-looking tax plan sounds like something you would like to try, or if you’re unsure about your tax situation, give our office a call at 913-393-1000 or fill out the form below. Our team of financial planners and CPAs will sit down with you to make sense of your tax situation and your overall financial life.
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Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.