The Internal Revenue Service has stepped up its audits over the past few years. In addition to traditional face-to-face audits, it is also conducting an increasing number of correspondence audits where taxpayers are requested to verify various expenses by mail.

Increasing scrutiny is being given to tax preparers who prepare fraudulent returns. Once a “bad” preparer is discovered, the IRS criminal division, which sports a greater than 95 percent conviction rate, goes after him or her. The audit division then begins auditing all the preparer’s returns looking for repetitive errors.

A favorite area for fraud is the Earned Income Credit, which can be worth thousands of dollars to taxpayers with young children and income under a certain level.

Sometimes couples pretend to be unmarried and have the wife claim the kids while subtracting the husband’s high income from the return in order to qualify for the credit. What most taxpayers don’t realize is that if their preparer is cheating on their return, he is cheating on most of his returns, ensuring that eventually he will be caught.

Those tax preparers receiving a 1099-C for cancellation of debt are being aggressively audited. Many taxpayers neglect to report the income at all. It is possible in some cases to exclude a portion or all of the debt relief due to the Qualified Principal Residence Exclusion, the Qualified Real Property Business Indebtedness Exclusion or Insolvency. The rules are extremely complex and one should submit a paper return with the supporting documentation to confirm you are entitled to the exclusion(s).

If you are claiming mileage, you are required to keep a log showing the business miles and business purpose of the trip. Commute mileage doesn’t count. This is a favorite area of scrutiny for the IRS and it is a stickler for detailed written logs.

Office in the home deductions are questioned most often when someone works as an employee. The office needs to be for the employer’s convenience, not the taxpayer’s. A common question is “would you be fired if you did not have the office in your home?” Written corroboration from the employer is often required.

Many people when they prepare their own returns don’t bother to include sales of stocks or mutual funds. Since the IRS doesn’t know the cost basis, it assumes zero and sends out a letter with a large amount of tax due.

Some taxpayers will fail to report sales because it’s a loss, so the IRS shouldn’t care. However, the IRS doesn’t know it’s a loss. You are also missing out on a tax benefit that could carry over far into the future.

Charitable contributions are now being closely scrutinized and require written backup. Taxpayers with a high level of contributions for their income are sometimes subject to correspondence audits.

Businesses that deal in cash including construction continue to be profitable targets for the audit division. Comparing known and estimated expenses with stated income on the tax return provides the IRS with prospective audit targets.

Your tax preparer should be able to inform you of what records are required and the sensitive areas of your own particular returns.

Similar Posts

  • Tax Tips: Tax myths

    In an 1939 BBC broadcast, Winston Churchill called Russia “a riddle wrapped in mystery inside an enigma.” This would also be an apt description of our tax code. Our tax laws are written piecemeal year after year by lawmakers unfamiliar with our existing body of tax laws and with little thought toward coherence or consistency….

  • Tax Tips: Beating the taxman in retirement

    While you are working, the taxman has you at his mercy. You can take advantage of tax-deferred accounts and pension plans but after that you have little defense. When you are self-employed, you have more options available. When you retire, the situation changes dramatically and you can have a great deal of control over your…

  • Tax Tips: Self-employed retirement savings plans …

    Saving for retirement has never been more important. The Social Security system is being placed under increasing strain as people live longer and the baby boomer generation retires. Federal deficits should increase as the costs of Social Security and Medicare skyrocket and now the Affordable Care Act is added to the federal budget. This is…

  • Tax Tips: Tax myths

    With the tax code approaching the size of the Encyclopedia Britannica, it’s little wonder there are many misconceptions and erroneous beliefs regarding tax regulations. Many people feel that when making charitable deductions, as long as they have their cancelled checks or credit card receipt they’re covered. Nowadays, however, the IRS requires substantiation from the charity…

  • Tax Tips: Charitable contributions

    Americans are the most charitable people in the world, as evidenced by records of our annual donations of giving. Congress has been very generous in passing laws regulating deductions for charitable giving. You should consult IRS Publication 526 for the regulations governing the many aspects of charitable giving and the required documentation. In order to…