With the April 15th income tax deadline a month behind us, most accountants have been able to breathe a huge sigh of relief. However, the reality is that an accountant's job never truly ends with the end of tax season. There are always other tasks to accomplish, and one of the biggest tasks is helping an accounting client get through an IRS tax audit.
Of course, your best bet as an accountant is being proactive by teaching your accounting clients how to avoid IRS tax audits in the first place. As the old saying goes, "An ounce of prevention is worth a pound of cure." To help you and your accounting clients avoid a tax audit, the Rules of Thumb blog from MoneyThumb would like to refer you to this article from The Balance, The Top 13 Tax Audit Triggers.
We have listed below the first 4 of those 13 triggers from that article for your reading convenience, but we highly suggest all accountants read the above-referenced article in its entirety.
- The Computer Trigger--The IRS has a computer system that's specifically designed to detect anomalies in tax returns. It’s called the Discriminant Information Function (DIF), and it scans every tax return the IRS receives. DIF looks for things like duplicate information—may be two or more people claimed the same dependent—as well as deductions and credits that just don’t make sense.
- Over or Under-Reported Earnings--The majority of audited returns are for taxpayers who earn $200,000 a year or more, and most of them had incomes of over $1 million. If nothing else, all that income results in some pretty complex tax returns and complex tax returns are more likely to include errors. Conversely, you stand a higher chance of being audited if you manage to wipe out most of your income through the use of tax deductions. Only about 1 percent of taxpayers earning between $200,000 and $499,999 were audited in 2016, whereas 3.25 percent of those who reported no adjusted gross income found themselves under the IRS microscope.
- Income That Goes Unreported--The IRS gets copies of all reported income. DIF knows all about these information forms that the IRS receives, so up goes the flag if your tax return fails to include any of them. Keep careful track of all income you receive and be sure to report it. And you might want to keep track of income that does not result in an information return, too, such as tips, the cash you were paid for services, or income that falls under that $600 1099-MISC limit. With very few exceptions, all income you receive is taxable and must be reported.
- A Lot of Cash Spent or Deposited--Various types of businesses are required to notify the IRS whenever anyone engages in large cash transactions, typically involving $10,000 or more. If your accounting client has plunked down a lot of cash, you can expect the IRS to wonder where that money came from, particularly if your reported income doesn’t support it. The same thing goes for large cash deposits to your bank account.
To help you even further with handling IRS tax audits for your accounting clients, there are three free webinars happening in May 2019. These webinars are sponsored by Receipt Bank and presented by tax attorney Eric Green. Below is all the information you need to register for the webinars:
|Handling an IRS Exam Like a Pro
Thursday, May 16, 2019, 02:00 PM EDT
|Top Ten Audit Mistakes Made by Practitioners
Thursday, May 23, 2019, 02:00 PM EDT
|How to Recreate Records for an IRS Exam
Thursday, May 30, 2019, 02:00 PM EDT
Issues like the Quickbooks file, presenting documentation, recreating documentation, and handling the examiner will all be covered as Eric brings you up to speed on what to do to get the best exam results possible for your client.
- Understand the exam process from start to finish
- Identify opportunities to get documentation issues resolved
- Explain the issues surrounding the Quickbooks file and how to handle the auditor’s request
By using the information we have provided in this Rules of Thumb blog post, MoneyThumb feels that all accountants should have a much easier time of helping your accounting clients during an IRS tax audit.