Three Common IRS Tax Audit Triggers

May 21, 2012

- IRS Audit Help, IRS Audit Process, Tax Audit

If you want to hear IRS say “Come on down!” like Bob Barker or Drew Carey on “The Price is Right,” then you’ll want to be sure to make one of these common mistakes on your return. Did you know IRS is the ONLY agency of our government that is empowered to collect the money that our government will spend? Their job is to determine if the correct amount of tax has been paid. Sometimes their examination, or audit, results in money due you, a refund. Rarely, but it can happen, the audit winds up a “no-change”. The IRS Agent or Auditor finds nothing to change and no money changes hands. But more often than not, their examination, their audit, results in money you owe the IRS. IRS doesn’t have time or resources to waste on an IRS tax audit that does not bring in money. They even have a special formula they use in selecting the returns they want to audit. This formula is called the DIF score, or discriminate information function score.

Avoiding an IRS Tax Audit

Hundreds of thousands of returns have been examined over the years and the results of these examinations have enabled the IRS to hone their selection process. Has yours been one of those returns? Do you want to volunteer for an audit? Heck no, that’s why you are reading this! Avoid the following to lessen your chance of being invited for an IRS tax audit interview:

OMIT INCOME that should be reported. This can be “oops, I forgot.” “I lost this W2, this 1099.” It can mistakenly be, “How will they know?” What’s the difference? A W2 is what you get when you are an employee. A 1099 is what you get when you are an independent business owner. There are many kinds of 1099 forms. When you fail to report income that someone else has reported to the IRS because they want the deduction they are allowed when they pay you, you are omitting taxable income. This omission can be called unreported income. It can be called underreported income. It is often called “Audit”.

Filing a BUSINESS LOSS when you also have W2 income. Without going into how a tax return is prepared, or “built”, IRS will almost always look at this kind of return. Are you really engaged in an activity for profit? Are you serious about your business? Are you trying to deduct expenses for a hobby? Hobbies do not belong on Schedule C. Are you exaggerating your expenses? This is an audit.

How ROUND are your numbers? IRS does not want to see pennies on the tax return. They do want you to round your figures to the nearest dollar. But rounding to the nearest $5, $10, $20, $100 is not appropriate. If you have too many expenses with too round a number, IRS will wonder if you are accurately reporting your figures. They will want to ask you. That is an IRS tax audit.

I cannot overemphasize your need to keep records, your need to keep adequate and accurate records. Certainly, take the deductions you are entitled to, just keep your receipts, add you numbers carefully. Learn what you can do. And just as important, learn what you cannot do.

What steps have you taken in your business to avoid an IRS tax audit?

IRS Audits of Gambling Winnings and Losses

By Nellie Williams on

May 21, 2012

- IRS Audit, IRS Audit Process, IRS Tax Problems

W-2G is used to report Gambling Winnings. There are different reporting requirements depending on the type of game you won. If you were the WINNER you may or may not be ahead “of the game.” To avoid an IRS inquiry, report ALL gambling winnings, whether or not you received a W2G. You may be the luckiest person in the world. But did you know your winnings are taxable? Do you keep a record of your gambling activity? Did you know you are required to keep a log of your activity to document your gambling losses if you itemize your deductions and want to deduct those losses? It doesn’t have to be the end of the world to keep that gambling log. But IRS will tell you, you must keep that log if you want to deduct your losses. In addition to your losses, you also need to keep track of your winnings. Not all wins will result in you receiving a W2G form. You may be playing one of those mesmerizing games with pretty pictures and reels that spin. When you win whistles blow, bells ring, lights flash. When the win is large enough casino cashiers come running, well, not exactly running, but an attendant comes to help cash you out. This will be a W2G event. What about all those other little wins? You collect your cup full of coins, or your payout voucher, exchange those for pocket money and off you go. Well, that money you just pocketed represents gambling winnings that belong in your log. There is not Gambling Log Bible to help you know exactly how to track your activity. But a piece of paper is a good start. For each day that you place your bets, record the date, the city, the establishment, the amount of money you are starting your gaming day with, the types of games you played (slots, cards, dice, roulette, bingo, etc) and then whether you won or lost. And then enter how much money you left that establishment with. If you use a Player’s Club card, you may be able to get a report of your activity at the end of the year, but that really does not take the place of your gambling log. You may play the lottery. You may play the ponies. Whatever you play, keep track of your activity. Most people aren’t bookkeepers and just want to play, not do this activity log bookwork. But the rules are clear. All income is taxable except that specifically excluded by law and nothing is deductible except that allowed by law. And in this case the law states that you must be able to prove any losses you are claiming. If you don’t keep this log, you are not to deduct your losses. I know this is not the best news in the world. But wouldn’t you rather know now than wait until the IRS tells you when they invite you in for your own personal tax audit? Oh, you’ve never been audited and you don’t think you ever will be audited? Well, that’s what most people think. In addition to having been an IRS Tax Audit Supervisor, I, too, have been audited. I know how to prepare, but it was still unnerving when I was invited to “come on down” with all my receipts. It’s like the old adage says, “an ounce of prevention is worth a pound of cure.” Wishing you Many Happy Return$, Nellie Williams, EA