TIP: Avoiding A Tax Audit

Tip of the Month

November 2006

TIP: Avoiding A Tax Audit

With year-end approaching, itâs not too soon to be thinking about tax time. The Internal Revenue Service (IRS) has given taxpayers notice that it intends to continue to enforce the tax laws with rigorous efforts. That means that the odds of being audited have increased. That doesnât mean you shouldnât take advantage of all legitimate means to claim write-offs and reduce your tax liabilities. However, that being said, increased caution and the advice of your tax professional are your best means to avoid an audit.

Here are some of the red flags that may bring down increased IRS scrutiny:

Excessive itemized deductions--
Your tax professional can help you determine what might be termed "excessive." If your deductions appear to be well above the norm, youâll need to make sure you have appropriate documentation to support the claims.

Possible unreported income--
New technology has been helping the IRS to identify returns "most likely" to have unreported income. In the past, IRS efforts centered on excessive deductions. Believe it or not, this was better news for taxpayers. Underreporting income is much less easy to explain away than excessive deductions. Income is pretty much a black or white issue, whereas the ever-changing rules for deductions make the possibility of error more likely.

Incongruities between Schedule K-1 tax information and the respective ownersâ tax returns--
The IRS has the ability to match the millions of K-1s issued with the corresponding returns of owners. For a long time, the IRS suspected that income from partnerships and S- corporations was under-reported, and now it has the ability to match up "pass through" income from these businesses with the tax returns filed by their owners.

Schemes and Trust Deals--
Donât be tempted by companies promoting schemes to dodge taxes through "creative" trust deals or by tax schemes set up to take advantage of foreign tax credits to side-step taxes on income derived from domestic sources. As a rule of thumb, taxpayers owe taxes on income generated by their assets unless a corporation or some other separate entity that controls them pays the tax.

The bottom line is that it is smart business sense to take advantage of all legitimate tax-saving strategies that are available to you. If a ploy seems to good to be true, it probably is. Your professional tax advisor is the best person to provide expert counsel on your specific situation.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.