Before we get into tax issues:
WE HAVE GOOD NEWS ABOUT THE CORONAVIRUS OUTBREAK: IT WILL END!
Historically, when we have had severe downturns in the markets, we spend a lot of time speculating about what caused it and how long it will last. THIS TIME WE KNOW WHAT CAUSED IT!
According to the White House Coronavirus Task Force, the virus spreads rapidly, reaches a high point, and then begins to dissipate. They are starting to see this now in China. Our goal in the U.S. is to minimize the spread of the virus, so it doesn’t overwhelm our healthcare infrastructure. If we are successful, hopefully it will start to dissipate sooner. Those on the Task Force say this should happen in the coming months. When that happens, there is likely to be a surge of pent up consumer demand for products and services which should begin to strengthen our economy again.
Now let’s take a look at how tax audits work. If you are taking legitimate deductions, you should not worry. However, there are certain things that have been misused by some taxpayers, so the IRS gives them more scrutiny.
SOME COMMON TAX AUDIT TRIGGERS
TAKING HIGHER THAN AVERAGE DEDUCTIONS: Disproportionately high deductions compared to reported income.
WRITING OFF ALIMONY: This is a very complicated process, so the IRS often audits.
CLAIMING LARGE CHARITABLE DEDUCTIONS: This is especially true of non-cash deductions with no appraisals.
RUNNING A SMALL BUSINESS: Many small business owners don’t report all of their income.
INVESTING OR DEALING IN VIRTUAL CURRENCY: This has been an area where a lot of nefarious activity has occurred.
CLAIMING LOSSES FOR BUSINESS ACTIVITIES THAT LOOK LIKE HOBBIES: Self-explanatory.
HOW TO HANDLE A TAX AUDIT IF YOU GET ONE
DON’T IGNORE YOUR AUDITOR: The IRS will not go away, and they may assess additional taxes.
DON’T LIE TO AN IRS AUDITOR: Lying to an IRS agent is a crime.
PUSH BACK IF YOU DISAGREE: You have the right to appeal the case if you think the IRS is wrong.
MAKE SURE YOU HAVE FILED ALL OF YOUR TAX RETURNS FOR THE PREVIOUS 6 YEARS: If they find you have not filed previous tax returns, the auditor will file them for you with no deductions, credits or dependents.
BE PREPARED FOR THE AUDIT: Be able to explain sources of income and deductions. If they find you can’t explain your tax return, they may expand the audit. It might be worth having your accountant or CPA with you if you are not confident.
APPEAL TO THE MANAGER: If you don’t like how the audit is going appeal to the manager.
GET IT IN WRITING: If the auditor requests more information, get the request in writing. Auditors do a lot of audits and sometimes forget what they asked you for. It also helps if you have to appeal the audit later.
OBEY THE DEADLINES: Audits have deadlines for everything. If you miss a deadline you might not get a chance to make your case.
CONTEST THE PENALTIES: IRS auditors often assess penalties, such as the 20% penalty for negligence.
CONSIDER HIRING A PRO: It is easy to get in over your head if you are not familiar with tax issues. It is sometimes better to hire a professional if you feel like you have a lot of money on the line.
The good news is that historically only one out of every 184 people get audited, and only about 25% of those are in person. We hope you never have an IRS audit. But if you do, maybe these tips will help.
Sources: Whitehouse Corona Virus Task Force; financial-planning.com; Kiplinger Tax Letter