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I have represented many clients in an audit. The majority of tax returns not prepared by me; I might add! My rule is to prepare a return as though there will be an audit. The good news is the IRS is auditing less returns due to budget cuts. But, don't roll the dice. I have observed these five most common red flags:
Excessive Auto Mileage
Let me ask you, could you substantiate your records detailing trip purpose and business miles driven? Do you record beginning and ending mileage? Do you use your vehicle for business and personal? If so, how many miles are personal use? When these records are not available, the auditor will disallow your deduction.
I know it is a hassle to keep a log, but technology has made this task more palatable. Also, many employers have accountable plans (require documentation for reimbursement).
2. Meals
Meals that are not for client meetings or provided for employees are non-deductible unless you are on a business trip. In other words, if you go to McDonald's alone for lunch in your tax home- this is not tax deductible. There are two tiers 50% and 100% deductible.
50% Deductible
A meal with client where work is discussed
Employee meals
Travel meals
100% Deductible
Company-wide holiday party
Food and drinks provided to public
Write the purpose of expense on receipts and or bank and credit card statements
3. Travel
In an audit you must substantiate time and place of expense along with the business purpose of trip. Your receipts or bank and credit card statement records will not sufficiently prove business travel.
4. Home Mortgage Interest Claimed on Schedule C (Business Return)
Yes, I represented a client in an audit where his tax preparer added his mortgage interest as a business expense. Naturally, the deduction was disallowed. Unless you own your office building, mortgage interest is a personal expense.
5. Fraudulent Tax Preparers
Over the years, I have obtained new clients because their tax preparer is under criminal investigation by the IRS or State agency for filing fraudulent tax returns. These preparers overstate deductions to increase their client's refunds. Their business model is to build a reputation on charging less to prepare the returns and obtaining large refunds for their clients. Thereby, building their practice on sheer volume. The problem is when they are caught, the IRS and or state will audit every return filed by them. Subsequently, the taxpayer is left with a huge tax bill. If it sounds too good to be true; it likely is!
To avoid these pitfalls and getting hit with a large tax bill post audit- remember to be prepared to substantiate all claims made on your taxes. Further, ensure your tax professional practices due diligence, too.
I have provided a short summary for this article. For more information, contact us at 770-575-9737 for a free consultation.
UPCOMING DEADLINES
Individual Tax Return (Extension) October 15, 2019
C Corporation Tax Return (Extension) October 15, 2019
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