The IRS audit force has doubled in the past year. And it’s expected to quadruple within the next 4 more years.
More auditors = more audits.
There are two basic strategies to avoiding a hit from an IRS audit.
Strategy #1: Stay off the IRS Red Flag Radar
Strategy #2: If You Have a Potential Red Flag, Create a Solid Defense Now
First, let’s look at ways to avoid IRS red flags. Here are top 5 audit red flags for businesses.
Audit Red Flag #1 Filing as a Sole Proprietorship (Schedule C on your Form 1040)
If you file as a Sole Proprietorship you have 1 in 3 chance of being audited. It’s that simple. If you incorporate your business you have somewhere between a 1 in 50 to 1 in 100 chance of being audited.
So, it’s up to you. Do you want a 1 in 3 chance of being audited? Plus, pay more taxes, have more risk and never build business credit? If that sounds like something you do NOT want. Then you should NOT be a Sole Proprietorship when you file.
Audit Red Flag #2 Failing to report an officer salary on Form 1120S
The GAO just finished up a review for S Corporation Form 1120S and the results were startling. They found that 68% of the S Corporation returns had been filed wrong.
They are now calling for an increased review of S Corporation returns by the IRS. The #1 problem is failure to report officer salaries. If you have an S Corporation with a profit, make sure you pay yourself a salary. And make sure that the salary is reported on the right line of your tax return.
Audit Red Flag #3: Filing Early
And extension of time doesn’t mean an extension to pay your taxes. If you’re late paying the money, you’ll owe penalties and interest.
So, pay an estimate of the tax due when you file your extension.
Audit Red Flag #4: Using the Wrong Business Code
You will be asked to provide a business code when you file your business return. It’s easy to just blow it off and put whatever number is first on the list. But, if you do that, you’re asking for trouble down the road. That’s because the IRS will compare your business with other business like it. They are looking to see if your expenses are in line (as a percentage). Be careful with the code you put down for your business. You’ll be judged against other businesses with that same number.
Make sure you’ve got the right business code when you file.
Audit Red Flag #5: Filing With Real Estate Professional Status
If you have real estate losses, then you probably already know about the rules regarding losses. If you make less than $100,000 in adjusted gross income, you can only take $25,000 in real estate losses against other income. If you make over $150,000, you can’t take any losses.
The exception is if you become a real estate professional. As a real estate professional, you can take an unlimited amount of losses against your income. No matter how much the losses. No matter how much your income.
But the IRS is on to this one and there are a lot of audits specifically targeting real estate professionals. If you have a real estate loss and you’re a real estate professional, be ready for an audit. It doesn’t mean you can’t take advantage of this tax break, it does mean that you need good records. Make sure you come back on Thursday to go through specific items to watch on your return.
This week is Audit Survival Week at USTaxAid.com! Please check back each day for the following topics:
Monday: 5 Things You Didn’t Know About Filing Your Return That Could Cause You An Audit
Tuesday: 4 Things You Must Avoid If You’re Filing an S Corporation Return
Wednesday: Is Your State About To Put You Out of Business? 3 Things To Fix Now
Thursday: What to Do When the IRS Says They Want to Audit Your Real Estate Losses
Friday: You vs. the IRS: 3 Little Known Secrets To Winning an Audit
Are you getting all the tax breaks you should? Are you concerned that your return might be a red flag? Find out how our tax professionals at USTaxAid Services can work with you. Contact Us.