If you’ve been losing sleep over the possibility of a tax audit, put your mind at ease. Here are five reasons why you might want to stop worrying about it.
A Tax Audit is Not Always Trouble
An audit doesn’t automatically mean you’re in trouble. Sometimes, it’s just a random selection. Even if there’s a discrepancy in your return, like a math error or typo, the IRS may simply ask for additional documents or an amended return.
Most tax audits focus on returns filed within the last three years. Rarely do they go back more than six years, so you don’t need to worry about ancient tax seasons.
Reduce Your Risk
Certain items on your tax return can attract the IRS’s attention. Just be diligent and accurate in your data collection which can reduce your chances of an audit.
Stay Calm
If the IRS does audit you, don’t panic. It’s a specific process, and you can work through it with the right documentation. This is why it is important to work with a certified tax preparer or better yet, an Enrolled Agent. An Enrolled Agent (EA) is an individual who has earned the privilege of representing taxpayers before the Internal Revenue Service (IRS).
For taxpayers in the middle or lower income range and have relatively uncomplicated taxes, the likelihood of an IRS audit is quite minimal. For example: between the years of 2010 to 2019, the IRS audited approximately 0.25% of individual tax returns on record.
The IRS usually focuses their audits on high income earners. In 2019, a little more than 2% of Americans earning more than $5 million per year had their taxes audited. That’s down from 16% in 2010. “For taxpayers earning over $1 million, there has been substantial reduction in audit rates, but they are still audited more frequently than taxpayers earning below $200,000,” said Alex Muresianu, a policy analyst at the Tax Foundation.
Learn how to avoid the possibility of a tax audit…
Be thorough and accurate when reporting all of your expenses
Itemizing tax deductions with accuracy is essential
Provide appropriate details when required
File your taxes on time, as much as possible
Avoid amending returns. If you must, proceed with caution
Check your math. Now, check it again
Avoid using round numbers
Do not make too many deductions
Although there is no guarantee that the IRS won’t audit you, knowing some specific facts about tax audits during the filing process can help alleviate your concerns.
Now is the time to perform a mid-year review of your business activities. Staying on top of these five steps will benefit you throughout the year while saving time, money, and making tax time a breeze.
* Lower taxable income with these deductions
After assessing your cash flow, explore reinvesting within your business. Whether it’s buying new equipment or expanding your advertising efforts, these investments often come with tax advantages. As part of your business, you can typically deduct equipment and advertising costs on your tax returns.
Review this list of small business deductions you can take to help your business grow and lower taxable income:
* Managing personal and business finances separately
As your business income becomes consistent, consider opening a dedicated bank account or credit card for business use. This simplifies tracking income and expenses and provides a central reference point for tax filing.
Separating business and personal finances is a smart move. To get started:
Open Up Separate Accounts: Set up distinct bank accounts, with one for business transactions and the other for personal use. This will ensure a clear separation of these accounts.
Track Your Transactions: Record all your business related income and expenses separately. Use your favorite accounting software or a spreadsheet to stay organized.
Avoid Mixing Business and Personal Funds: Never use your business funds for personal expenses, and vice versa. Keep them separate for easier management.
Remember, this practice simplifies tax reporting during tax season and protects your financial well being!
* Organize receipts for expenses
As a business owner, working to maintain detailed records of your transactions is crucial to your tax time success. Here’s why keeping your business receipts organized matters:
Expense Management: Receipts will help you track your expenses effectively, ensuring you manage costs efficiently for all of your business needs.
Accounting and Budgeting: This data will provide a clear record of business expenses and all income, which can be used in financial statements and other accounting records.
Accurate Financial Records: Receipts serve as documented proof of financial transactions, essential for bookkeeping, accounting, and tax purposes.
Legal and Tax Compliance: Having receipts ensures compliance with tax laws and protects both buyers and sellers by injecting transparency into transactions.
So, snap those receipts and keep them organized during this mid year tax review — it’s more than just storage; it’s about financial health! If you haven’t done so yet, there’s still time to catch up!
What are the benefits of quarterly estimated tax payments and how should you prepare for them…
Avoid a Big Tax Bill: By paying quarterly, you are able to spread your tax liability throughout the year. This will prevent a hefty tax bill when it comes time to file your annual return. It’s like making payments in installments rather than all at once.
Penalty Prevention: You should stay current with your taxes. If you underpay or miss payments, the IRS may impose penalties. Quarterly payments will help you stay on track and avoid any surprises.
Estimation Process:
Gather Information: Estimate your taxable income, including any self-employment income, interest, dividends, and other earnings.
Deductions and Credits: Consider deductions (like business expenses) and tax credits (such as child tax credit or education credits).
Last Year’s Return: Use your previous year’s tax return as a guide.
Calculate Tax: Determine your income tax and self-employment tax (if applicable).
Remember, quarterly estimated tax payments keeps you in good standing with the IRS and ensures a smoother tax season.
As a business owner, maintaining meticulous records of your income and expenses is crucial. Here’s why:
Clear View of Cash Flow: Detailed records provide insight into your business’s financial health. You can track cash flow, identify patterns, and make informed decisions.
Maximizing Deductions: Good records help you identify eligible deductions. By keeping track of expenses, you can maximize deductions and reduce your taxable income.
Estimating Quarterly Tax Payments: Accurate records allow you to estimate quarterly tax payments effectively. Staying current with taxes ensures smooth financial management.
Whether you use software or spreadsheets, organized records empower your business!
Take the time to tackle these steps to minimize any tax liabilities and stay on top of your finances.
This blog post serves as informational content and does not constitute legal or financial advice.
Filing deadlines often change for taxpayers in regions that experience natural disasters. When these extreme weather events hit, the Internal Revenue Service frequently provides tax due date extensions to areas designated by the Federal Emergency Management Agency (FEMA). The relaxed due dates are intended to give more time to the individuals and businesses impacted by the natural disaster to prioritize relief and recovery instead of drawing their focus to a filing deadline. Following are notices for the upcoming tax season. We encourage you to visit the Tax Relief in Disaster Situationspage on the IRS website for the very latest updates.
Arkansas High Winds and Flooding
On May 24, heavy weather in Arkansas created tornadoes, straight-line winds, and flooding for several counties in the state. The IRS issued these regions (designated as a disaster zone by FEMA) additional time for their tax deadline. The new date is November 1 for businesses and individuals filing tax returns. The list of qualifying counties can be found in the IRS info link for Arkansas.
A storm system over West Virginia hit on April 2, 2024. The following damage caused FEMA to designate certain counties as disaster zones. The IRS issued a filing extension to the affected regions now due November 1, 2024 for entities and individuals in the impacted areas. The full county list and additional instructions are available in the IRS news release.
Landslides, mudslides, and other extreme weather struck Kentucky on April 2, 2023. A taxpayer deadline extension from the IRS now allows for a new date of November 1, 2024 to businesses and individuals from the impacted counties.
The IRS decided on a new tax payment date for the counties of Bristol and Worcester, MA after a storm event from September 11, 2023 brought flooding to the region. The current filing date for affected individuals and business entities is now July 31, 2024.
An intense storm system came through Texas on April 26, 2024 causing straight-line winds, tornados, and flood damage. More than a dozen counties will receive more time time to file taxes according to a recent IRS notice. The new due date for tax payments is on November 1, 2024. The full list of counties can be found through the IRS link.
Iowa experienced destructive weather and tornados on April 26, 2024. Eight counties in the disaster zone quantified by FEMA qualify for extra time filing taxes according to a recent IRS notice. The new date for payment is October 15, 2024. A second round of storms hit May 20, 2023. Those affected can find out more about their tax deadline on November 1, 2024 here. The state will also create a temporary taxpayer assistance center.
Storms with strong winds and tornados destroyed areas of Nebraska on April 26, 2024. A disaster relief extension from the IRS now allows taxpaying entities to file on October 15, 2024. Visit the information release for the full list of counties the tax postponement affects.
Tornados ripped through Ohio on March 14, 2024 causing damage to for tax-paying businesses and individuals. The IRS created an extension to September 3, 2024 for the counties impacted by the high winds to help to those impacted by the weather events focus on reconstruction and sooth financial worries.
High winds, storms, flooding and tornados struck several counties in the state of Oklahoma on April 25, 2024. In an information release, the IRS issued an extension to taxpayers in the affected counties to ease tax-related burdens to those impacted by the weather events.
Parts of Hawaii and counties in Maui have been granted an additional individual and business return filing extension now due August 7th, 2024 to help the victims of the fires to focus on disaster recovery.
Heavy storms in the Wrangell Cooperative Association of Alaska Tribal Nation caused landslides and mudslides beginning November 20, 2023. Taxpayers of the FEMA-identified region may qualify for a tax filing extension now due July 15, 2024. The full guidelines with additional information and the required qualifications are available on the IRS website.
Wildfires burned in Spokane, Washington beginning August, 18 2024. Taxpayers in Spokane County may qualify for a tax filing extension due June 17, 2024 designated by the IRS to encourage disaster relief. The full guidelines on qualifications are available at this IRS Information link.
Fierce weather struck San Diego on January 21, 2024 causing serious damage to individuals and infrastructure. The IRS recently declared that those who qualify (as having their business or property hurt by the disasters) will have until June 17, 2024 to file their taxes.
Michigan Severe Weather: Flooding, Tornadoes, and Storms
Powerful storms rocked Michigan August 24, 2023. FEMA ruled that many counties experienced natural disasters and the IRS will allow them to qualify for a filing extension which now has taxes due June 17, 2024. All counties which qualify are included in this IRS news release link.
Mudslides and Other Extreme Weather in West Virginia
Landslides, mudslides, flooding, and storm damage hit West Virginia counties August 28, 2023. Taxpayers in the region may qualify for extra time filing taxes with a new date of June 17th, 2024 established by the IRS.
Several counties in Maine will experience a tax payment due datechange toJune 17, 2024.This decisions comes in the wake of heavy storms which hit the region December 17, 2023. A list of all areas designated by the IRS under the relief order can be found below. Another round of weather on January 9th, 2024 struck the state causing the IRS to provide extensions until July 15th. The relief package information for this disaster event is available here.
A tax deadline change toJune 17, 2024 was issued by the IRS to victims of extreme weather occurrences inProvidence County. Citizens and businesses of the county affected by the disasters have been given additional time to get their taxes in order because of the damage caused by the intense weather of September 10, 2023. Another pattern of severe weather on December 17th and Jan 9th caused additional flooding. The relief extensions from these natural disasters last until July 15th and are available at this link.
The recent severe weather on January 10, 2024 caused widespread damage to taxpayers in Connecticut. To offer relief to those affected in New London County, and the Mogehan and Mashantucket Pequot Tribal Nations, the IRS extended their dues until June 17, 2024.
A recently announced filing deadline for both individuals and business organizations in parts of Tennessee is now in effect. The severe tornadoes prompted the IRS to extend the due date for payments to June 17, 2024. People, households, and entities with addresses inside the area designated by FEMA are automatically able to make use of the extension. They do not need to contact the IRS to become eligible.
55 of 58 counties in California qualify for a 2022 tax season filing extension which is now due on November 16, 2023. This deadline extension originates from strong storms in the region last winter which caused flooding, landslides, and other severe weather phenomena.
The IRS adjusts due dates for certain payments and filing that fall between Oct. 7, 2023 and Oct. 7, 2024. Individuals such as humanitarian workers and businesses whose central place of operation is Israel may be able to receive this relief.
Individuals or businesses residing in Jefferson, Orleans, Plaquemines and St. Bernard parishes may now be able to delay filing returns and paying taxes until Feb, 15, 2024.
Qualifying farmers and ranchers in 49 states, two U.S. Territories, and D.C. who were forced to sell livestock due to drought conditions will have an extended window to replace the livestock and report gains.
The IRS has announced tax relief packages for regions in the states of Florida, Georgia, and South Carolina to help those affected concentrate on rebuilding after the storm. Tax payments are now pushed back until February 15th, 2024.
Filing deadlines often change for taxpayers in regions that experience natural disasters. When these extreme weather events hit, the IRS frequently provides tax due date extensions. The relaxed due dates are intended to give more time to the individuals and business impacted by the natural disaster to prioritize relief and recovery instead of drawing their focus to a filing deadline. Following are notices for the upcoming tax season. We encourage you to visit the Tax Relief in Disaster Situations page on the IRS website for the very latest updates.
Hurricane Idalia
The IRS has announced tax relief packages for regions in the states of Florida, Georgia, and South Carolina to help those affected concentrate on rebuilding after the storm. Tax payments are now pushed back until February 15th, 2024.
Parts of Hawaii have been granted an individual and business return filing extension until February 15th, 2024 to help the victims focus on disaster recovery.
As of last week, the Internal Revenue Service (IRS) has taken decisive action to address concerns regarding the improper filing of Employee Retention Credit (ERC) claims, announcing a moratorium on new claims through at least the end of the year. This decision is aimed at protecting unsuspecting tax businesses from falling prey to scams that are orchestrated by aggressive promoters of the credit; these egregious marketers have been targeting ineligible applicants, who risk paying the credit back on top of interest and penalties.
What is the ERC?
The ERC is a legitimate pandemic-era tax credit designed to support businesses that continued to pay employees during the COVID-19 pandemic while facing operational suspensions or significant declines in gross receipts. The program is not available to individuals.
To be eligible for the ERC, employers must meet extremely specific requirements, including sustaining a suspension of operations due to government orders, experiencing significant declines in gross receipts, or qualifying as a recovery start-up business during specified periods.
The Employee Retention Credit is notoriously complex, and its esoteric qualifications affect multiple government agencies; with this high level of intricacy, and now the potential risk of being scammed, many legitimate businesses are now hesitant to claim the credit, or potentially even try.
How are businesses being scammed?
The moratorium, ordered by IRS Commissioner Danny Werfel, comes in response to increasing evidence of ineligible and potentially fraudulent claims entering the system. The IRS had previously intensified its focus on reviewing ERC claims for compliance concerns, including escalating audit efforts and criminal investigations into promoters that filed suspicious claims.
However, as of July 31, 2023, the IRS-CI initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims, resulting in federal charges for fifteen of these cases. Six matters have led to convictions, with an average sentence of 21 months. These efforts are part of the IRS’s broader strategy to address COVID-related fraud, totaling over $8 billion in suspected pandemic fraud.
To avoid fraudulent efforts in relation to the ERC, businesses should remain cautious about aggressive marketing tactics that promote risk-free ERC submissions. The IRS has identified several warning signs, such as unsolicited calls or advertisements offering an “easy application process” and promoters claiming they can quickly determine eligibility. Furthermore, large fees up-front and fees based on a percentage of the ERC refund are also red flags.
For businesses, there are significant risks associated with improper claims, including the potential repayment of credits along with penalties and interest. To protect against questionable claims and potential scams, businesses should collaborate with trusted tax professionals who understand the complex rules associated with the ERC. Additionally, the IRS has released tools to help determine ERC eligibility, including an FAQ page and a question-and-answer guide. If a business suspects a scamming attempt, Form 14242 can be used to report suspicious or abusive tax promotions.
What should businesses know about the moratorium?
For those who have already filed to claim the credit, payouts for legitimate ERC claims will continue during the moratorium period at a slower pace. The processing time for existing ERC claims will extend from the standard 90 days to 180 days or more, depending on the level of compliance review required. The IRS may also request additional documentation from taxpayers to verify the legitimacy of their claims.
Our Chief Revenue Officer at Drake, John Sapp, CPA, puts it this way: “IRS is slowing down the ERC payment process to circumvent fraud. Similar to when police setup a random ‘license checkpoint’ – it slows down traffic but may keep unlawful drivers from getting on the road.”
Additionally, the IRS is developing new initiatives to assist businesses victimized by these aggressive scammers, including a settlement program for reimbursement of improper ERC payments. Likewise, a specialized option to withdraw claims will be made available for those who have filed unprocessed ERC claims. Ideally, this functionality will help businesses avoid repayment issues and the payment of contingency fees to promoters. However, it’s important to note that individuals who have filed fraudulent claims may still face criminal investigation and prosecution if they choose to withdraw.
In its broader compliance efforts, the IRS is collaborating with the Department of Justice to combat ERC fraud and take action against marketers disregarding the program’s rules. Auditors with specialized training are examining ERC claims with the highest risk of noncompliance, while the IRS Criminal Investigation division actively identifies promoters of fraudulent claims for potential referral to the Department of Justice.
Overall, the IRS has recently taken measures to address concerns regarding improper ERC claims and protect businesses from fraudulent schemes. The IRS efforts through the moratorium on new claims, enhanced compliance reviews, and collaboration with the Department of Justice seek to uphold the ERC program and prevent abuse, ideally empowering eligible and legitimate businesses to claim the credit without fear of being exploited or reaping financial repercussions. As a tax professional, you can advise and guide your clients to exercise caution when dealing with belligerent promoters and take necessary next steps if they are implicated in fraudulent activity.
The Internal Revenue Service says it’s about to move its main audit spotlight from the everyday working-class individual taxpayer to those engaged in high-income activities. Now on the audit radar: high-income earners, partnerships and large corporations, and promoters pushing schemes that abuse the tax laws.
This turn of focus comes after a comprehensive review of IRS enforcement efforts funded by the Inflation Reduction Act. All changes are meant, the IRS says, to help restore fairness in the American income tax system.
So Why Do This Now?
The audit rates for the wealthy, partnerships and other high earners have dropped sharply over the last 10 years. New technology, such as Artificial Intelligence, can now be used to crack complex financial arrangements in record time — an effort that used to take human enforcement agents months.
The upgrade in technology will help the IRS spot emerging compliance threats and schemes early on, while also improving decision-making for audit selection of taxpayers so that “no change” filers are not unduly burdened.
Called the High Wealth, High Balance Due Taxpayer Field Initiative, the new IRS effort focuses on taxpayers with total positive incomes above $1 million and more than $250,000 in tax debt.
The agency has had some measure of success recently with high-income tax cases, collecting some $38 million from more than 175 high-income earners. The IRS says that effort will be expanded with the new initiative, contacting about 1,600 taxpayers and hopefully collecting hundreds of millions of dollars in taxes owed.
Turning Scrutiny Toward Large Partnerships.
As of 2021, the IRS already had a Large Partnership Compliance (LPC) program, but the IRS intends to expand it, increasing the number of partnerships examined to take in some of the biggest and most complex partnership returns the agency receives. This, the agency says, is where AI can help, speeding up the screening process of complex returns and flagging those returns that need closer examination.
This part of the upgrade plan could become reality very soon, with examinations planned for 75 of the largest partnerships in the country. These companies have an average of $10 billion in assets each, and include hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms, and others.
Other Work slated for 2024 includes:
Expanded scrutiny of digital assets. A review of the IRS Virtual Currency Compliance Campaign showed as many as 75% of taxpayers with digital assets could be non-compliant on their income tax returns, according to records from digital currency exchanges.
Examination of high-income taxpayers for FBAR violations. A Report of Foreign Bank and Financial Accounts (FBAR) is required when a U.S. citizen has an interest in a foreign financial account holding more than $10,000 in value. The IRS took a look at filing patterns and found hundreds of possible FBAR non-filers with average account balances of over $1.4 million.
Investigating shell companies posing as labor brokers. Tax investigators say they’ve found instances where construction contractors are making 1099-MISC or 1099-NEC payments to what appears to be a subcontractor – but it’s a “shell” company with no employees, no equipment, and no business links to the contractor. The money paid, ostensibly for labor services, instead flows back to the contractor’s pocket.
As part of the overall effort, the IRS is also working to help individual filers who are not considered “high-income.” The audit rates for taxpayers making less than $400,000 a year are being held steady. Fairness safeguards are also being added for individual taxpayers claiming the Earned Income Tax Credit, or EITC.
Taxpayers claiming the EITC were historically audited more often than those at the upper end of the income scale. In fact, audit rates for high-income-level filers, corporations and partnerships dropped sharply in recent years while the much-less well-off taxpayers saw higher audit rates.
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