- information is omitted
- report high incomes
- self-employed
- fail to file necessary schedules/forms
- receive large refunds
- deduct casualty losses
- claim tax credits
- report foreign bank accounts (or don't)
- fail to report income reported to IRS by third parties (e.g. banks, brokers, 1099's)
- high income with rental losses
- currency transaction reports (CTR) (report of a cash deposit of more than $10,000) Form 8300 filed with IRS.
- document mismatches
- informants (e.g. disgruntled spouse or employee)
- referrals from other federal or state agencies
For most taxpayers, whether a business or individual, the chance of an IRS examination (audit) is about 1%. For a taxpayer earning over $1,000,000 per year, the odds exceed 8%. Less than 1% of S-corporations and partnerships filed are audited.
We've been through several audits where the IRS has denied business deductions because of lack of receipts. You need 2 things to prove a deduction:
1. a receipt showing what was purchased, and
2. proof of payment, Without both, the IRS has denied.
For meals & entertainment (M&E) expense you need documentation to prove it was a necessary business expense. You should keep a receipt with the name of the person you met with and the nature of the business discussed (who, what, where, when & why).
To back up gas expense you need to keep a mileage log. Another document the client should keep, (even if using the mileage method for automobile expense) are records of auto repairs. Auto repair bills have the odometer readings - this helps to justify any mileage claimed. IRS will look to disallow auto mileage without backup receipts.
The IRS will look to disallow any business expense debited on a bank statement without having the applicable backup receipt.
Fun Little Tax Quiz on IRS Audit of Schedule C
Assume that you are one of the almost 4% who are going to have your Schedule C business expenses audited by the IRS.
You had the misfortune of being chosen through random selection (50% of audits are random selections; the other 50% are based on test scores).
The three lines on Schedule C that contain the expenses that the IRS is most likely to audit are:
1. Car & truck expenses on line 9,
2. Travel on line 24(a) and
3. Meals & Entertainment on line 24(b).
The reason the IRS targets these lines is simple: The law requires specific records for these expenses. If you don't have properly kept records, you get no deductions.
Car & Truck expenses: You must have a log that proves your business-mile percentage. Regardless of how you deduct your vehicle, you must have a supporting mileage log.
IRS Standard Mileage Rates
Auto & Vehicle Standard Mileage Tables
If you use the IRS standard mileage rate, you need the mileage log.
If you use the actual expense method, you need a mileage log -- and you may not use the business standard mileage rate for any vehicle after taking any depreciation expense under MACRS or §179 on that vehicle.
In addition to the mileage log, if you are using the actual expense method, you must have a receipt for any car or truck expense.
If you use an appointment book or calendar, save it along with your copy of the tax return. A mileage log can be reconstructed from those pages;
Save vehicle repair receipts—repair bills often contain the odometer reading, and total mileage for the year can be extrapolated if there is more than one receipt;
Record your beginning and ending odometer reading in your appointment book on Jan 01st and again on Dec 31st.
Travel expense during the travel, you need both:
receipts for expenses, and
entries for each business day saying where you were and listing your business reason(s) for being there that day
See IRS Pub 463, Travel, Entertainment, Gift, and Car Expenses to determine what you can and can’t deduct and follow the rules.
Meals & Entertainment expense, including entertainment involving meals, you need:
WHO - record the name or names of the person(s) you entertained,
WHAT - record the business reason for the entertainment,
WHERE - record the place and type of entertainment,
WHEN - record when the business meeting occurred,
WHY - record the purpose of the business meeting,
HOW - keep receipts for any entertainment.
Regardless of the system you use (journal, diary, ledger, calendar, computer, tablet, iPad, iPhone, smartphone...), make sure that you write down, on a timely basis, the answers to the documentation requirements; WHO, WHAT, WHERE, WHEN, WHY, HOW. The law requires timely recording, which the IRS says is anytime within one week.
We've been through several audits where the IRS has denied business deductions because of lack of receipts. You need 2 things to prove a deduction:
1. a receipt showing what was purchased, and
2. proof of payment, Without both, the IRS has denied.
For meals & entertainment (M&E) expense you need documentation to prove it was a necessary business expense. You should keep a receipt with the name of the person you met with and the nature of the business discussed (who, what, where, when & why).
To back up gas expense you need to keep a mileage log. Another document the client should keep, (even if using the mileage method for automobile expense) are records of auto repairs. Auto repair bills have the odometer readings - this helps to justify any mileage claimed. IRS will look to disallow auto mileage without backup receipts.
The IRS will look to disallow any business expense debited on a bank statement without having the applicable backup receipt.
Fun Little Tax Quiz on IRS Audit of Schedule C
Assume that you are one of the almost 4% who are going to have your Schedule C business expenses audited by the IRS.
You had the misfortune of being chosen through random selection (50% of audits are random selections; the other 50% are based on test scores).
The three lines on Schedule C that contain the expenses that the IRS is most likely to audit are:
1. Car & truck expenses on line 9,
2. Travel on line 24(a) and
3. Meals & Entertainment on line 24(b).
The reason the IRS targets these lines is simple: The law requires specific records for these expenses. If you don't have properly kept records, you get no deductions.
Car & Truck expenses: You must have a log that proves your business-mile percentage. Regardless of how you deduct your vehicle, you must have a supporting mileage log.
IRS Standard Mileage Rates
Auto & Vehicle Standard Mileage Tables
If you use the IRS standard mileage rate, you need the mileage log.
If you use the actual expense method, you need a mileage log -- and you may not use the business standard mileage rate for any vehicle after taking any depreciation expense under MACRS or §179 on that vehicle.
In addition to the mileage log, if you are using the actual expense method, you must have a receipt for any car or truck expense.
If you use an appointment book or calendar, save it along with your copy of the tax return. A mileage log can be reconstructed from those pages;
Save vehicle repair receipts—repair bills often contain the odometer reading, and total mileage for the year can be extrapolated if there is more than one receipt;
Record your beginning and ending odometer reading in your appointment book on Jan 01st and again on Dec 31st.
Travel expense during the travel, you need both:
receipts for expenses, and
entries for each business day saying where you were and listing your business reason(s) for being there that day
See IRS Pub 463, Travel, Entertainment, Gift, and Car Expenses to determine what you can and can’t deduct and follow the rules.
Meals & Entertainment expense, including entertainment involving meals, you need:
WHO - record the name or names of the person(s) you entertained,
WHAT - record the business reason for the entertainment,
WHERE - record the place and type of entertainment,
WHEN - record when the business meeting occurred,
WHY - record the purpose of the business meeting,
HOW - keep receipts for any entertainment.
Regardless of the system you use (journal, diary, ledger, calendar, computer, tablet, iPad, iPhone, smartphone...), make sure that you write down, on a timely basis, the answers to the documentation requirements; WHO, WHAT, WHERE, WHEN, WHY, HOW. The law requires timely recording, which the IRS says is anytime within one week.
