January 10, 2012
Red Flags for Audits
January is a great time to organize your tax documents! Since the IRS is stepping up its audit rate for individuals, it is more important than ever to have substantiation for all of your deductions. Please see our tips below for record keeping and documentation.
Top Audit Flags
Even if you are never audited, it's important to know areas the IRS will scrutinize on a regular basis.
Red Flag # 1:Overestimating value of donated goods
While we encourage you to take a charitable donation for used items such as clothing and furniture, it's important that you determine a fair value for a donation. As a general rule, the IRS likes to see individuals value the items they donate at anywhere between 1% to 30% of their purchased price. This information is part of your return, so be sure to stay within the IRS guidelines. When I donate used items, I first take pictures of the donated items with my digital camera and then store the images on a CD labeled "Donations for 20XX".
Red Flag # 2: Under-reporting income
Nearly every client receives certain tax forms that are reported to the IRS. For example, most of you receive Form 1099-INT for interest income you receive or Form 1099-DIV for dividends you receive. Other tax forms, such as Form 1098 or Form K-1 are also common. That's why we ask if you had, for example, a 1099-INT from Bank of America last year but don't give us a similar form for this tax year - you'll probably get a notice if we don't report income from all tax forms the IRS receives each year. So when you receive tax forms, make it a habit to group them in a specific place so we are aware of all income reported to the IRS that you need to report.
Red Flag # 3 Income Thresholds
There is no action you can take on this one, but be aware that the more money you make, the higher your chances are of being audited. If you earn more than $100,000 a year, you are in a group that has an audit rate of at least double those earning less than $100,000 a year.
What to do if you receive a letter from the IRS
The first thing we want you to do is to notify our office and send us a copy of the correspondence you received from the IRS. Next, don't panic! Usually letters just ask for more information and we can easily resolve the issue. No matter what, don't talk to the IRS alone. Let us represent you as we have the experience to deal with the IRS.
Please call us if you have any questions. Now that we have additional staff, we are gladly accepting new clients, so if you know of a person or business that needs tax or accounting help, please let us know.
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