You better think again about taking that deduction

Posted: April 10, 2014

IT'S TAX TIME AGAIN. And there are some deductions that could get your small biz in trouble with Uncle Sam.

I'm talking about red flags for audits. Of course, it's never a good idea to cut corners, but doing so is especially problematic when it comes to filing your federal tax return.

I reached out to Ed Jenkins, tax director at CBIZ MHM, an accounting and professional-services provider in Plymouth Meeting, about some things that could trigger an audit and what to do if you're audited.

Here are some top red flags:

Income greater than $1 million. The IRS has increased the number of audits for high-income taxpayers. In 2011, the IRS audited 12.5 percent of all individuals with incomes of more than $1 million. According to the IRS, high-income individuals are a primary contributor to the so-called tax gap, the difference between the amount of tax that is owed and the amount of tax that is actually collected. The tax gap is estimated at $450 billion.

Outliers in a return. Bet you didn't know Uncle Sam has a scoring system that looks for anomalies (when compared with statistical norms) in a tax return. Claiming a loss from a business year after year is a dead ringer. Is that expensive sound system or flat-screen TV really a business expense? Multiple years with no or little income raises suspicions of unreported income.

Charitable contributions that require an appraisal. When this occurs, either because of the size of the gift or the type of property given, some specific rules come into play on how to report the gift, qualifications of the appraiser and the form of the appraisal. The IRS scrutinizes these very carefully, and agents with specialized training are often assigned to determine the accuracy of the amounts claimed.

What if you get audited? Here's what should you do:

Get your documentation and work papers in order. Uncle Sam will likely ask for documents such as past tax returns, financial statements, receipts, etc. You don't want to be unprepared when you meet with the feds, but you don't always have to give them what they ask for. It's always best to consult with your accountant or tax professional first.

Give the IRS the bare minimum. Don't hand over more documents than the IRS requests, and only answer what agents ask. You're not required to volunteer more than what is asked. Don't lie or avoid answering questions, but generally the less said the better. CBIZ MHM put it this way in a post on its blog: "Think of the trophy fish mounted on the wall with the inscription underneath that reads, 'Even a fish wouldn't get caught if he kept his mouth shut.' "

Hire an expert. Some CPAs are not as experienced as others in representing a business before the IRS during an audit. Consider hiring somebody who has worked with the IRS and has experience with the audit process. Having the right person on your side can remove some of the stress and possibly improve your results.


On Twitter: @MHinkelman

Online: ph.ly/YourBusiness

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