Tax Tips
Are you asking for an IRS audit?

By Howard Abrams, PBS Tax & Bookkeeping

I always worry about getting audited by the IRS. How do they decide which tax return to audit?

The most common way a return is chosen for audit is not because of one item, but by a group of items such as various deductions being too high compared to the amount of income that the taxpayer has reported. Individual areas that might result in an audit are mortgage interest being too high relative to the amount of your income, travel expenses too high, and meal deductions too high.

Another method that the IRS uses to determine whether or not to audit an income tax return is commonly known as the “red flag” theory. Under the red flag theory, the IRS may pick your return for audit because of one particular item on the return. The IRS may pick your return for audit just by chance. Don’t fear an audit. Most can be resolved through the mail.

If you have an unusual situation where your deductions are not corresponding with the amount of income that you report, but you can support your deductions, then by all means claim those deductions. For example, if you are a family of four and you have a mortgage of $15,000 interest expense, property taxes and a reasonable amount of charitable donations, you should at least have the income to support those deductions and maintain a reasonable standard of living.

Generally speaking, a tax return has to make sense. Your income and deductions should be in line with your standard of living. Our job is to make sure the amounts on your tax return are reasonable. If not, we will ask you about them.

Is there a rule of thumb the IRS follows in deciding whether to audit a tax return?

The IRS actually compiles statistics as to what the average tax return looks like.

For instance, if your adjusted gross income is between $30,000 and $40,000, they are looking at a property tax deduction of approximately $2,700; mortgage interest in the amount of $5,500; medical and dental expenses in the amount of $3,100; and charitable donations in the amount of $1,200.

If your adjusted gross income is $40,000 to $50,000, your itemized deductions would include taxes of $2,800; mortgage interest of $6,600; medical and dental expenses of $4,100; and charitable donations of $1,700. Again, these are averages. If your mortgage interest happens to be more with the same adjusted gross income bracket, then claim it.

If you happen to be audited and do not agree with the final result, you can appeal. You can also appeal any adjustments to your tax liability. To do so, contact the IRS or a tax professional.

I’m an owner-operator, and I’m concerned about losing my assets if I’m in a terrible accident. My buddies tell me to incorporate or operate under a limited liability company, or LLC, to protect my assets. Is this the proper thing to do?

Yes, and no. The proper thing is to ask a professional about what to do. Some people just go ahead and act based on what their buddies say. We are not attorneys and therefore we cannot recommend any type of entity to operate as to liability protection. What we can recommend and do recommend is to talk to an attorney. An attorney is the only one who can judge whether a particular operating entity will provide you with the liability protection you seek.

What we can alert you to is insurance coverage. Your liability limits on your homeowners and truck policies are possibly too low in light of the many personal injury awards. In addition to talking to an attorney, talk to your insurance professional about adding “umbrella coverage” to your homeowner’s policy. For example, a $5 million umbrella liability policy may cost about $1,500 per year, or you can have lesser premiums for lesser coverage. This may satisfy your needs and could be cheaper than changing your operating entity.

This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact us at 800-697-5153. Visit our website at PBSTax.com.

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.

This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact us at 800-697-5153. Visit our website at www.pbstax.com.

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.