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:

1. 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”.

2. 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.

3. 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?

If you use your car for business, the business use of your vehicle could be one of the biggest business deductions you take. But that deduction comes with the requirement that you keep a log of your business miles. More than that, you also need to be able to prove the total miles driven. So many of my clients believe this is more trouble than it is worth. The polite version of what they say is this auto log is a pain in the butt. And I tell them, it’s okay if you don’t want to keep that auto log. But the IRS says, “no log, no deduction.” You don’t have to keep the log, but if you don’t you can’t take the deduction. Does it really have to be such a difficult task? I say, no. It’s just a matter of making it easy and making it a habit. I’ll tell you how I keep my auto log. Now this might sound just like the green-eye-shaded accountant with no life, but you can make it fun. Begin your New Year with a New Mileage Log. Get yourself a little calendar you can keep in your car. Choose a pencil with a pencil clip so you can clip that pencil to your log. I keep both of these tools in the pocket of my driver’s side door. My log is easy to use because it is handy. I don’t have to look for it. It is not lost with all that other stuff in my car glove box. Depending on what part of the country you live in, you might call that the glove compartment. Does your car have a “trip meter” in addition to the odometer? That trip meter makes it so easy to track the miles driven on any individual trip. But you also want to record the total miles driven each year. Knowing the total lets you determine the business percentage of your miles driven. Outside sales people can drive a LOT of miles for business. And without the log, many believe they drive 90%-95% for business. Only the ambulance and the garbage truck (and some other specific purpose vehicles) are driven 100% for business. Some people are surprised to find while they drive a lot for their work, their business percentage is much less because of the personal use of their car. Commuting (driving from home to work) is personal mileage and is not deductible. Commuting is discussion that deserves its own blog and I will post that later. You can choose to deduct the actual expenses of operating your vehicle or the standard mileage rate allowed. That standard rate changes every year. 2011 was a “split” year. The standard mileage rate for January 1 thru June 30 was 51 cents per business mile; the rate for July 1 thru December 31 was 55.5 cents per business mile. The rate for 2012 remains 55.5 cents per business mile. Actual expenses would include fuel, maintenance, repairs, depreciation of the purchase price, etc. If you choose the actual expense method, only the business percentage of those expenses are deductible. Regardless of the method you choose, you will want to keep your gasoline receipts and your repair bills. Both will be used by the IRS to verify your deduction and your mileage log. They don’t want to just take your word for it. They want to VERIFY your documentation. So join me on New Year’s Day in recording my odometer for the start of the year. That same odometer reading is the ending mileage for the year just closed. And if you are starting you log after the year has begun, don’t let that stop you from beginning. You need to start somewhere and you need that log to protect your deduction.