How to Keep out of the IRS Audit Trap
After four+ decades of advising IRS audit victims, some things have become clear to me. Here are four thing I’ve learned that audits have in common:
- Self-employed folks, particularly those filing taxes as sole proprietorships or just “solos” are picked on more than any other group.
- Most solos are not good record-keepers, and the IRS seems to have an uncanny knack of knowing just who they are. More folks lose their audits for poor recordkeeping than for any other reason. For example: Having an inadequate vehicle mileage log, or not keeping one at all.
- Small business owners reporting losses on a tax return are prime IRS targets. Since a business loss can reduce your overall tax bill, the IRS wants to know if you are really trying to make money or just tax deducting your hobby. Example: Hava Hart, a prominent heart surgeon, has a horse farm she visits on weekends. The good doctor claims a $20,000 farm business loss on her tax return. This saves her almost $10,000 in federal and state income taxes, year after year. If audited, the IRS is likely to be skeptical as to whether Dr. Hart had a profit motive, or just liked to ride horses and her weekends away from the hospital.
- Audits beget more audits—an audit “triple play.” Usually only one tax year is initially selected by the IRS for an audit. But, as often is the case, if any problems are found by the auditor, two more years are opened up for audit. And, the IRS may keep a closer eye on the unlucky auditee for years to come!
There’s a lot more I’ve learned about the IRS. If the idea of being picked for an audit scares you, check out my website, taxattorneydaily.com or my book, Stand Up to the IRS (Nolo) by Frederick W. Daily.