Larry Bormel
We’ve been hearing that it’s coming, and it’s now here. Unfortunately for those selected, the IRS has stepped up its audit and enforcement efforts well beyond what we have seen in the past decade.
High-income individuals and self-employed businesses appear to be among those most likely to be examined by the taxing authorities. Taxpayers with incomes of more than $200,000 are three times more likely to be audited than the average joe, and those with income of more than $1 million are six times more likely to be audited. The government needs additional revenue, and it’s easier to get it from those who have money.
More than 1.5 million tax returns were audited in 2010, with approximately three-quarters being correspondence audits and one-quarter being face-to-face. There were almost twice as many audits last year as compared to 10 years ago.
A few of the common areas subject to IRS scrutiny include business use of vehicles, meals and entertainment, travel, professional and consulting fees, employment of family members and charitable contributions.
The key to successfully substantiating your deductions is to maintain proper and contemporaneous documentation. Auto logs supporting business use of your vehicle are the preferred record of car and truck use. Restaurant receipts should include the “who,” “what,” “when,” “where” and “why” of the business meals. Acknowledgement receipts or letters from qualified charitable organizations will best support your charitable contributions.
Perhaps the most important action to increase your chance of navigating an IRS examination successfully is to hire a qualified certified public accountant (CPA) to represent you during the audit. Although some people try to handle their own audits, they generally fare poorly because they are nervous, raise issues that the IRS was not challenging, provide more information than necessary and lack the experience to take an assertive position with the auditor.
If audited, hopefully yours will be among the 5% of tax audits that result in additional refunds from the IRS.
Larry P. Bormel, CPA, is president of Bormel, Grice & Huyett P.A., an accounting, tax and consulting firm located in Laurel. He can be reached at 410-792-7259.
