2017 Tax Audits
With the beginning of tax season approaching, many businesses and individuals will soon be turning their attention to their tax returns. One concern that is inevitably on many taxpayers’ minds is the possibility of being audited by the IRS.
A tax audit is an examination of an organization’s or individual’s tax return to verify that financial information is being reported correctly. While the odds of being selected for closer scrutiny are statistically low, there are factors that could increase the likelihood of receiving an audit notice.
There are a variety of potential “triggers” in tax returns that may raise questions and attract unwanted attention from the IRS. The IRS uses a computer scoring system, called the Discriminant Information Function system, which analyzes tax deductions, compares taxpayer data, and is often the basis for initiating an audit.
Issues can arise when, for example, income is not fully reported, business operating losses are considered out of the ordinary, there are errors, omissions, or inconsistencies in the return, or there is an appearance of lavish business expense deductions for meals and entertainment. Additionally, sharp decreases in reported income from one year to the next can attract greater scrutiny.
Exceptionally large charitable deductions can sometimes trigger an IRS audit, but are usually allowed when a taxpayer has receipts and documentation to support them. Examiners also pay closer attention to cash-intensive businesses such as restaurants and convenience stores, which generate a lot of cash receipts from smaller transactions.
It is strongly advised to keep detailed records. This helps ensure that if you are questioned by the IRS, you'll be able to substantiate deductions, income and other information. Have a bookkeeping system that creates a clear and accurate record of all transactions, and maintains and preserves source documents used for accounting and tax preparation.