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How to Survive an IRS Tax Audit

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IRS tax audit, IRS Tax Help, accounting servicesTax time is already stressful enough without mentioning the incidence of tax audits. Both businesses and individuals are exposed to IRS tax audits, which ensure that the income and expense deductions are in compliance with tax laws.

While an IRS tax audit might be a scary prospect, it can be handled in a way that minimizes its negative impact. While you may still incur penalties and/or fines, understanding the process can help you prepare adequately.

The first step is to understand the type of IRS audit you are subjected to. In general, there are three types of audits the IRS may decide to use for you or your business:

  1. Audit by Correspondence: Through this type of audit, the IRS will be requesting supporting information through the mail. This is the most common and easiest type of audit and involves only one or two tax issues. Follow the instructions explicitly. Do not try to read between the lines, give them exactly (and only) what they ask for.
  1. Office Audit: This type of audit will require you to go to the IRS office for the audit to be performed. This is quite similar to the correspondence audit. It usually only deals with one or two items, and the IRS will provide you with a list of what they need. These audits are usually limited to a certain part of your taxes. While you may request for the meeting to take place at your business or home, it is preferable to conduct it at the IRS office.
  1. Field Audit: In this case, an IRS agent will be assigned to your case and will perform the audit on site at your business or location. This is a more serious type of audit, through which you will need the help of a tax professional. This is a serious deal, get help!

Here are a few steps you can follow to survive an IRS audit:

  • Understand the process

It’s important to understand the audit process. Usually, it is rather simple and includes a notification from the IRS, as well as the documentation to gather and submit by the appointment date or deadline. The IRS usually reviews the submitted documentation and information and determines a final decision.

  • Prepare adequately

Preparing for an audit and getting organized is crucial! Having a reliable accounting system like QuickBooks or Xero will help in preparing more adequately. It will also contribute to a smoother audit.

If you haven’t been using a good accounting system, it is possible to reconstruct your transaction history. You can do this by contacting vendors and financial institutions, using the online platforms of your banks, or gathering your receipts and invoices.

An additional tip is to make copies of your original documentation and organize your supporting information well. This will help the audit be more organized and yield more positive results.

  • Get reliable professional advice

If your audit is either a field or office audit, you may want to consult a professional. A Certified Public Accountant (CPA), tax attorney, or Enrolled Agent (EA) can help you prepare your case, get organized, and negotiate a just resolution. The right tax professional can even help you minimize the negative impact of a tax audit.

In conclusion, keep in mind that IRS tax audits are common occurrences that can be managed effectively. Having the proper understanding, organization, and strategies can make the difference between a successful case and a failing one.

Contact us if you need any help with your taxes or with preparing for an audit. We’re here to help!

 Sources:

  • Laurence, J.D. Beth. “Checklist: How to Survive a Tax Audit.” Www.nolo.com. Accessed January 06, 2018. https://www.nolo.com/legal-encyclopedia/survive-irs-tax-audit-29478.html.
  • Murray, Jean. “How to Survive an IRS Tax Audit of Your Business.” The Balance. Accessed January 06, 2018. https://www.thebalance.com/how-to-survive-an-irs-tax-audit-of-your-business-398979.
  • Taulli, Tom. “4 Ways To Survive A Dreaded IRS Audit.” Forbes. August 06, 2017. Accessed January 06, 2018. https://www.forbes.com/sites/tomtaulli/2016/11/26/4-ways-to-survive-a-dreaded-irs-audit/#5dd.

 

 

 

 

 

 

 

 

 

7 Tax Tips to Avoid an IRS Audit with Your Small Business

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tax filing, tax accounting, tax accountantBeing subject to an IRS audit can be a monumental challenge for your small business. In fact, the IRS has been getting more vigilant in their approach toward such businesses in recent years. However, there are ways to avoid an audit.

As you file your small business tax return this year, here are seven tax tips you can use to protect yourself against an IRS audit:

1. Use a good record-keeping system

A reliable record-keeping system is the key to not only save money but also maintain adequate tax documentation. Research what kind of documentation you need to gather and maintain for your tax needs. Ensure that you have processes in place to keep this support at tax time.

2. Decide on the best accounting method for your business

Businesses use one of two tax accounting methods: cash and accrual. Depending on the nature of your small business, its legal structure, and its credit situation, you may consider one of these accounting methods. Even if you happen to pick one not suited for your business at first, there are ways to resolve any discrepancy.

3.  Stay current on tax filing and file any past due returns

If there is an issue, and you’re current, your tax professional has a lot more options to help you resolve it. If you happen to have any past due tax returns related to your business, make sure to file them as soon as possible. This will help you avoid any penalties and interest and get on the right track with your taxes.

4. Clarify any unusual circumstances

If you or your business encounter any unusual circumstance (such as an inheritance) discuss it with your tax professional. They will likely ask all sorts of clarifying questions to determine whether or not you A) owe taxes on it and B) it is a reportable event.

5. Report all your business income

One of the things the IRS looks at in determining their audit cases is whether all income is reported. Make sure to obtain and maintain records of all your business income. Ensure that you have matched all your records and reported the right amount.

6. Review your tax return

There are many details that can fly under the radar during the tax review process. Make sure to carefully go over your tax return before submitting it. Even if you’re using a tax professional to help you file, ensure that you also review and understand your return before final submission.

7. When in doubt, use a tax professional

Filing your business’s tax return can be a complex process. If you have doubts as to how to undertake this process, consider consulting with a tax professional. They can help you better navigate the filing process and submit a more accurate return.

Are you wondering how to survive an IRS tax audit?

Contact us for a free consultation at (561) 842-1304.

Sources:

  • “Avoiding Problems.” Internal Revenue Service. Accessed January 08, 2018. https://www.irs.gov/businesses/small-businesses-self-employed/avoiding-problems.
  • “Six Tips to Avoid an IRS Audit.” Six Tips to Avoid an IRS Audit | NAEA. February 12, 2013. Accessed January 08, 2018. https://www.naea.org/newsroom/press-releases/six-tips-avoid-irs-audit.
  • “Visit the IRS Small Business Tax Center for All Your Tax Needs2 | Internal Revenue Service.” 2 | Internal Revenue Service. Accessed January 08, 2018. https://www.irs.gov/newsroom/visit-the-irs-small-business-tax-center-for-all-your-tax-needs2.

 

 

 

8 IRS Audit RED FLAGS you MUST avoid when preparing your taxes

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8 IRS Audit RED FLAGS you MUST avoid when preparing your taxes
Filing an income tax report is like walking on egg shells, do not be swayed by audit baits that will send the IRS knocking straight on your door. While the agency is reportedly having cuts in their budget, which would likely translate to fewer audits, that does not mean they are letting their guard down. 

Now let’s walk through standard IRS tax filing errors and find out how you can steer away from committing the same mistakes.

1. Declare ALL of your income.

IRS does not rely on your honesty, according to the National Association of Enrolled Agents (NAEA), it uses an automated form-matching program that detects discrepancies between what you report and what is in their database.

Copies of form W-2 for the wages, as well as 1099s for interest, dividends and capital gains filed by independent contractors and freelancers,  are also sent to the IRS. Always reflect these figures on your federal tax return or any discrepancies will trigger correspondence audit.


2. Don’t declare losses for extended periods, unless you can prove it.

Nobody is running a business for charity. It is understandable that new ventures need to recover the operation costs for a year or so before beginning to generate projected profits, and the IRS acknowledges this, but over declaring losses for an extended period will often sound the alarm for an IRS audit.

IRS tax attorney Garrett Gregory of Addison, Texas said: “report losses for three or more years and the agency will start to suspect ‘hobby lost’ cases” he said: “often calls for field audits which are in-person and more onerous than a correspondence audit.”

Be ready and keep records of your business expenses, document everything to prove you have a real business.

“You want to prove that you ‘breathed it, ate it, slept it, and drank it,’” Gregory added.


3. Anything Weird – Explain it.

Anything that looks off and questionable is among the IRS first red flags. Be the best judge, anticipate which of the entries would likely call for extra clarification, and provide it.

NAEA said insufficient net income, for example, warrants explanation and would require disclosure statement detailing how you managed to pull yourself off, either through savings, loans or credit cards.


4. Home Office Deduction Triggers.

Never report deductions for both office and home rental. Typically, your office is in one place, if not then explain it.

NAEA suggests that if your rental expense is for a business storage unit or equipment, it should be labeled property as ‘storage rental’ or ‘equipment rental.’

 

5. Report ALL Sales Incurred.

Bear in mind, the IRS has complete access to all necessary files and has programs that ultimately leave you no room to hide, either intentional or not, don’t leave anything out.

When you sell your home, the title company will send the IRS a 1099-S form, recording the proceeds from the sale. Even if the capital gains on the sale fall below the tax-exempt limits, it is still recommended to report the information on your return.

The same applies to the sale of mutual funds. Enrolled Agent Stephen DeFilippis of Wheaton, III said: “that in particular cases like selling a mutual fund bought before 2011 outside of tax-advantaged retirement account and reinvesting this in another mutual fund, must be reported or the IRS will assume the total proceeds from the sale are all taxable gains.”


6. Include Your Overseas Money.

If you think the IRS audit cannot sniff this, you are wrong. Under the new Foreign Account Tax Compliance Act (FATCA) foreign institutions will soon be sending this information to the IRS like any other bank or brokerage would in the United States.

If you fail to declare this income, penalties and back taxes will soon be crawling on your back.

 

7. Watch out for Mortgage Interest Deductions.

DeFilipis said: “when you co-own a house with your spouse, the lender sends you and IRS Form 1098, which records your mortgage interest during the year. However, often, this record also shows the social security numbers, should the person die, and the surviving partner tries to claim the mortgage interest deduction, it is already flagged.”

These tax audit red flags may come in handy; the key is to go over this carefully and declare everything, or better yet hire professional accountants in West Palm Beach to do the job for you.

For more information, please contact us.

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A Basic Tax Guide for Freelancers

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IRS tax return, tax services, tax accounting

Independent contractors or freelancers are solely responsible for filing their Income Tax returns as well as ensuring that the Internal Revenue Service (IRS) receives the right information, regardless of the amount you earn. This is a serious matter, and you have to handle accordingly.

If you are a newbie, here’s some old hand advice on how you can effectively manage your tax account.

1. Keep Your Own Record.

As an independent player, you will be issued a Form 1099 at the end of the year, keep your record using spreadsheets, or better yet get small business accounting software like QuickBooks to make it easier to track.

Bear in mind the expert advice, that relying solely on 1099s to tell you how much money you have earned is too risky. Some clients miss payments and make mistakes in calculations, filing your record is the smartest way to avoid errors.

2. Don’t Attempt to Hide Anything.

Trying to make cuts on Freelancers Taxes is a no-no. Everybody sends copies of his or her 1099 to the IRS, so if you drop one out, the IRS system will undoubtedly detect the discrepancy. Although we know some clients do fail in record keeping, it is too risky, always be on the safe side.

3. Use Separate Business Accounts.

To quickly glean through independent contractors’ tax deductions, especially the newbies, simplify your records by starting off with a separate business bank account. This way, all of your personal spending will not get mixed up, and having different bank statements for your business makes it easier to backup the information on your tax return.

4. Expect Mandatory Self-Employment Tax.

On top of the regular income tax rate, independent contractors should expect mandatory self-employment tax designed to cover social security and Medicare concerns that would normally be withheld by a traditional employer.

5. Identify Your Deductible Expenses.

When it comes to IRS rules on deductions, it must be both reasonable and necessary.  Take for example the equipment you need and travel expenses; as long as they are incurred as an indirect result of your freelance work.

One good thing with independent contractors’ tax deductions is it be can used to save for the future. Consult with a financial planner or a retirement specialist to find out how you can fund your retirement without the 401k or pension benefits a regular job might provide. There are many options: IRAs, Roth IRAs, investments, etc.

Get Professional Help.

Filing your taxes can be a daunting experience, especially if you have not been keeping records, there’s a lot to look into, and management is an entirely different thing to accounting. Why not get some professional help from The Balance Sheet Accountants? They not only take charge of your tax concerns but can help you analyze your financial standing with the tools that they use and experience they bring to your company.

Call us at (561) 842-1304 for more information on how we can help.