Bottom Line
Tax Tips
IRS audit and tax tips

Barry and Howard
PBS Tax & Bookkeeping Service

As you may have heard, the Internal Revenue Service is stepping up its income tax return audits. There are three types of audits the IRS claims it is going to be doing more often in the next year or so.

Some are picked at random. Of course, there is no protection against this type of selection. It does not matter what your return looks like or how much money you make.

Others are selected as a result of the IRS questioning items on your return after they have reviewed it. This can be related to the level of income or some of the deductions taken. The third type of audit has not been done by the IRS in the past 10 to 15 years; it is called a compliance audit.

These audits are used to compile statistics as to types of deductions, amounts of deductions and comparing them with income. They also are used to interpret how taxpayers are complying. The problem with the compliance audit is, essentially, they are a line-by-line audit of the entire income tax return. Therefore, these audits can be quite extensive and time consuming. It is very difficult for an individual to handle a compliance audit on their own because if there are differentials, they are going to be hard to explain, and you may lose the argument.

In addition to the IRS checking items in any of these audits, and in addition to just satisfying them as to the deduction’s validity, the service also will look at the economic feasibility of the tax return as a whole. By that I mean, if the person’s income is in the $20,000 to $30,000 range and they have mortgage payments totaling $15,000 to $20,000 and two children at home, that would not seem to be an economic reality.

The IRS will then question whether all income has been reported. Another problem taxpayers face when they are audited is the IRS will total the deposits to all the taxpayer’s bank accounts. They take the position that all deposits are income until proven otherwise. Hopefully, if deposits total more than your gross income, you can explain it by having paperwork showing some of the deposits were the result of loans, refunds, transfers, etc.

Be prepared to back up your business expenses. Expect the IRS to ask about the following areas:

  1. Was all your business income reported?
  2. Did you write off any personal expenses as business expenses?
  3. Are workers incorrectly classified as independent contractors when they are legally employees?

If your tax return does include unusual items, it is always a good idea to attach proof of those deductions.

Audit guides

  1. You have the right to postpone the audit in order to get your records and information gathered. Always request more time if needed.
  2. Do not have an audit conducted in your home or place of business, if possible. Go to the IRS or better yet have your tax professional represent you.
  3. Do not provide the IRS with more information than requested.
  4. Be prepared to owe something; chances are you will (statistically speaking).
  5. Always consult a tax professional prior to the audit. If the audit is not going well, request a recess to consult your tax professional. Any fee paid to a tax professional for audit representation is deductible.
  6. If you feel the auditor is treating you unfairly, ask to speak with the auditor’s manager.
  7. If you don’t agree with the audit results, you may appeal.

Tax tips
Unmarried couples can save on their taxes by planning their joint finances carefully. Here are some tax tips to help: Claim your partner as your dependent. Since unmarried couples can’t file jointly, they lose on the joint filing rates, but they may be able to claim a dependency exemption if they meet the following requirements.

  1. You must live together for the entire year.
  2. You must furnish more than 50 percent of your partner’s support.
  3. Your partner cannot earn more than $3,050.
  4. Your relationship cannot violate state law.

Another way to save is to hire your partner to work in your business. As long as the salary you pay is reasonable in relation to the work done, you can deduct the salary as a business expense. However, you must pay the employer’s share of Social Security and Medicare taxes on your partner’s wages.

It is also possible to deduct your dependent partner’s medical expenses on your tax return. When you pay medical expenses for someone you support, you can deduct the person’s medical expenses on your return.

This article has been presented by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter century. Contributions to this article were made by Shasta May, director business development for PBS. If you would like further information, please contact us at 1-800-697-5153. Visit our Web site at “Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.”