No sure way to avoid an audit
Well, here we go again, these days everyone is talking about audits. I normally try not to join into what everyone is doing but, Some things need to be Pointed out.
First and foremost, there is no sure fire formula or guide that dictates by “doing this you’ll avoid an audit.” At best you can do is lower the possibility and having the records to substantiate your return. Meaning, have the records to back up the numbers.
The IRS conducts random audits to serve as benchmarks for its examinations. The best things you can do are file on time and pay what you owe. When it comes down to it, punctuality and accuracy are the only things the IRS really wants.
Yet for those returns that aren’t pick randomly, there is a system of IRS software called the Discriminant Inventory Function System that analyzes tax returns for oddities and discrepancies. This secret software the IRS uses, is based on a closely guarded formula. Basically the system assigns each return a score that determines whether or not the IRS will audit you.
Here are some common “red flags“:
- significant income increase or decrease
- significant deduction-to-income ratio — say, $40,000 in deductions on a $50,000 income
- business deductions consisting of fancy dinners and pricy trips to the Moulin Rouge
- home-office deductions
- low tip income for workers who traditionally make a lot of money from tips
- income exceeding significant benchmarks, such as $100,000 and $1,000,000
- self-employment
- computational mistakes and typos
- incorrect Social Security number
- incorrect reporting of income, deductions, and the like.
- late filing without applying for an extension with Form 4868
- not paying your full tax liability without applying for an installment agreement with Form 9465
Obviously, you can’t avoid an income change if you get a better-paying job. If you’re self-employed, you’re self-employed you’re not going to change that. However, you can still do some things to decrease the likelihood you will be targeted for examination:
- Keep Good Records – in the grand scheme of things, this is easy
- Explain Yourself – include the receipts, a written explanation and any other appropriate documentation with your return
- Don’t go overboard with your deductions – especially if you’re self-employed. Also, don’t estimate your deductions — use exact amounts based on receipts.
- Beware of Tax Software - Tax software is great for returns at the simpler end of the range. But, when you start getting into deductions and complex sources of income, it is best to verify the accuracy of your return with a tax professional.
- A sloppy return is sure to get a thorough check by the IRS, especially if the all-important numbers are illegible.
- Check and Recheck Your Return – no errors in your math, make absolutely sure all your math is correct.
You might also lessen the chance for an audit by having it prepared by a professional. I have heard from local IRS auditors that say they are more likely to pick a self-prepared return then one prepared by a reputable tax pro.
The best way to handle an audit is to simply stay prepared for one. You should keep a record for every line item on a tax return.
The government (IRS) isn’t kidding. It wants its revenue, and if you can’t justify a tax break, it’s not likely that you’re going to be able to keep it.
Righteousness in Designation?
Friday I was interviewed and retained by a new client. This particular client has several issues that actually can fall in line with a great debate we have all been following.
First, a little background:
A young newly wedded (three years) couple has their tax return done by “pros” as they are not among those who follow the taxing world. We will call them Pat and Jody Taxpayer. Having just started their own Business they left HeRBert (the group who prepared their returns) for what to them was perceived as a tax professional. They retained a CPA to handle some general bookkeeping and complete tax returns.
Good choice?
Of course it is, “All but the militantly nefarious and hopelessly deluded concede that CPAs are experts at keeping books and records. There simply is no higher accounting “designation.” then CPA.
The CPA (Certified Public Accountant) maintained records by gaining access to Pat & Jody’s bank account using the online statements. The first tax season for this CPA came around and she completed the 2007 tax return. Another year passed, and she completed the 2008 return.
Several months ago, the IRS notified the Taxpayers that the 2007 return was under investigation. Seven lines on two different Schedule Cs were in Question.
Considering a CPA had prepared this return there should be no worries.
So how did I get this return?
When the time came for the audit with the “Tax Compliance Officer”, the CPA, had manufactured information to provide the IRS to validate two of the seven lines in question and did not show up to guide the Taxpayers through the 3 ½ hour long ordeal. Needless to say, the IRS found no substantial proof or validation for seven lines in question. P & J now are holding a bill from the IRS for over $10,000.00.
Not only are the taxpayers confused about what happened, but the “Compliance Officer” also looked at their 2008 return, they are about to undergo another audit.
“Because good accounting skills are a critical part of good tax preparation, CPAs are uniquely qualified to be tax preparers.”
So where is this CPA? Avoiding Pat and Jody.
This is a most uniquely “qualified” tax preparer?
I reviewed 2006 (again prepared by HeRBert – a fast food chain preparation service), 2007 and 2008 returns. (again, these two returns were prepared by the same “CPA”)
- 2006 had 6 errors resulting in a $213 refund to Pat and Judy (I can say this because I have already amended this return)
- 2007 has 21 errors - three missing forms (associated with errors) and if that wasn’t bad enough, 5 of the errors are mathematical.
“Good tax preparation is about numbers. It’s about keeping good books and records.
In short, it’s about good accounting.
In fact, what is a tax return if it’s not an accounting?”
Hummmmm
if anyone needs a definition to “accounting” I have a link to the right for Merriam-Webster Dictionary or you can click this.
Good thing it doesn’t suggest an ability to add or subtract.
Same for Accountant.
- 2008, well is just wrong. I say this because nothing changed from 2007 through 2008.
- 2007 consisted of
- 1040 Long Form
- 2 Schedule Cs
What the 2008 return consisted of was a 1040A – Short Form, nothing more.
My conclusion is this CPA stands proudly among those who are truly CPA tax professionals. You real CPAs who are tax pros, give her credibility she assuredly doesn’t need.
As for Jody and Pat, luckily they found a tax professional. I will help them through the amended returns, the audit up coming, and any and all IRS intervention that may come their way. If you wish to stay updated on their situation, I will create a blog page giving more detail information and will keep it updated.
However not all of you will see it this way. Why? Well, I am no longer a CPA. I am not an EA, nor am I an Attorney. What does this make me? I am an unenrolled preparer.
Unenrolled preparers, by definition, have no recognized credentials and are bound by no professional standards
And what are the unique qualifications of an unenrolled preparer?
Would someone please tell me?
Anyone?
The silence is deafening.
That’s because the answer is “none . . . nada . . . zero . . . zilch.”
The silence sir, is deafening because you are on your computer. But now, please, open your eyes fully, adjust your glasses, I want you to hear me plainly.
An unenrolled preparer is a unique person. Like a Lawyer, a CPA, or Doctor or any other profession, you are going to have unqualified hacks. My Credentials are useless in the taxing industry.
Or did you miss it?
The AICPA told a CPA/Tax Professional “We do not offer a credential in taxation. In general, our approach has been not to develop credential programs around areas for which the public already believes CPAs to ‘own’. In addition, we do not endorse a particular tax credential.”
An unenrolled preparer sees how others take advantage of the miss-conceptions of the designation and learns tax rules and regs to help people through what can be a very taxing time (no pun intended).
I question your thinking when you say a man with over 35 years in the tax preparation industry has no credibility. I only have 23 so I must not have any either?
Hummmm, let’s look at my background a bit:
a) A Masters in Accounting
b) Formally employed by this countries (at the time) Largest Accounting firms
c) Formally a CPA
d) 23 years preparing returns for taxpayers
Of the four listed in my mind, only qualifies me to call myself a tax professional. I can assure you it isn’t one of the top three.
“There simply is no higher accounting designation.”
Thus, if the Internal Revenue Code imposes an affirmative duty on taxpayers to maintain good books and records, doesn’t that alone explain why CPAs are uniquely qualified to prepare tax returns and why many CPAs are drawn to the field of tax preparation?
Of course it does.”
You Pompous arrogant ass. Is your head so high in the sky that you are not getting enough oxygen?
True enough, the IRC does affirm duty to taxpayers to maintain good and accurate records. Alone that tells me (a former CPA) should seek advice from a CPA on how to keep those records not how or where to put them on a tax return.
It is my opinion that a good majority of the CPAs that are drawn to taxation and preparation do so for the money.
(Not to get off subject, but are you actually a licensed Tax Attorney, and a CPA? I know a few Lawyers and I’ll have to ask, to be sure, but I think like the AICP, there is nothing out there for Lawyers to hold actual “tax” credentials. If I am wrong please correct me, do you have some designation that says you’re a Tax Lawyer? If so, what is it?
As for not being bound by professional standards, I find it hard to understand why I have to point out to a designated pro that we (The Unenrolled prepares) are bound by the same rules in Circular 230 as you are. Maybe you should read it some time.
A while back, I post Who is: a post that defines different titles. If you want to see the entire post please click on the link Who is: Below is a brief recap:
A Tax Attorney - Typically large and even small businesses will meet with a tax attorney once every quarter or once a year to ensure that they are making the best possible business choices with regards to investments and tax issues. Since the taxation, laws change constantly.
A Bookkeeper – is responsible for keeping accurate, up-to-date business records for proper cash flow management, balance sheet preparation, and developing expansion and investment plans.
Accountants – keep track of a company’s money.
Enrolled Agent – is a federally authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals.
Tax Preparer – an individual who prepares tax returns.
Other post from the “taxguy” blog that may be related to the taxpayer issue mentioned in this post.
Choosing the Right Representative
5 Worst Things You Can Do if You Get an IRS Collection Notice a Guest post from Peter Pappas. . .
How to Avoid IRS Penalties and Interest
Picking A CPA With Too Much. . .
Picking A CPA With Too Much. . .
Picking A CPA With Too Much “Accounting” Experience That Doesn’t Relate To You!
This is another addition to the series “Mistakes made when choosing a paid tax preparer”.
Most people don’t realize this, but many CPA’s usually spend most of their time doing accounting and auditing work – NOT taxes! (CPA = Certified Public Accountant) They get paid to sign off on accounting, payroll and complicated bookkeeping for larger businesses. So when it comes to preparing taxes for the regular middle income family, it’s just not something they’ve been spending their time thinking about or doing much of, or most of the year.
CPA’s have a ton of experience in many very complicated accounting practices, doing very complex audit work and usually doing a really great job helping some large business or very high net worth rich guy with his investments and taxes. But, for most tax returns that are filed each year, nah.
Look here, does this sound like your tax return? I thought so.
You are not alone. The majority of regular middle income folks will never need the experience coming from a CPA’s background because the accounting and auditing work does not relate to their normal family income status. Am I saying all CPA’s are wrong for you to choose to file your taxes? Absolutely not. There are some Certified Public Accountants who take the time to keep up with the latest tax laws. They’re specialist.
In most cases however, you are better off finding a tax preparer who is good at doing what you need done. And in this case, if the tax preparer preparers a lot of middle income tax returns already, that’s even better.
Think of it this way: Would you use a sledge hammer to hang a picture frame? (I didn’t think so.) Remember: Go with a tax professional with TAX preparing experience, not auditing or accounting or something else that doesn’t relate to you!
In my post Who Is. . . I list the different professions that prepare taxes. A Tax Attorney, A Bookkeeper, Accountants, Public accountants, Management accountants, an Enrolled Agent, a Tax Preparer. All are qualified to handle your return preparation. I ask that you chose someone who fits you. Look around
Please catch my guest post over at The Wondering Tax Pro. Where I give my tax advice. BEST OF THE BEST – BRUCE MCFARLAND is the start of a series of Guest Post for TWTP so he can spend his week locked in at work. Yes tax preparers work all year, not just January thru April.
Several of us are giving out our best advice in the tax world. Try not to miss the series. (it last all week)
Tax Carnival #41: TaxtoberFest 2008 is up don’t miss my entry there. There is a lot of great entries for this carnival, make sure to read them all.
Again, I want to invite you all to write guest post on this subject. I want to hear from all bloggers or just readers with their own input. Let’s see what you see I have missed. If you have some words of wisdom on this subject please let us share it with everyone, if it is something that has already been covered, so what, I am looking for others to tell what they know or have learned about finding a paid preparer. I have room for two more guest spots.
Guest Post Living Almost Large
This is another addition to the series “Mistakes made when choosing a paid tax preparer”.
Finding a Tax Preparer
I’ve only used a tax preparer once in my life. That was the year we moved cross country and were unfamiliar with the new tax laws in the state.
We found a preparer by asking our neighbors. He was fantastic. Problem? He charged an arm and a leg. He was definitely more for people with a lot more assets than we had. I’m not saying I would go to H & R Block; those people only take a 12 week course and then are “qualified” to prepare taxes.
Honestly I know more tax law than many of them who are on message boards talking about taxes. Thus our mistake was finding an overqualified Certified Professional Accountant. Yes we needed help, but I doubt we needed someone so qualified.
Turns out, that the CPA we used had to fill out a lot of extra forms because of the filing status of my DH from non-resident to resident. Also he helped us with our international declarations of non-residence status. So perhaps it was worth it
Overall we paid $800 for our taxes to be prepared. The best part was we are now able to follow how the CPA filed the taxes. And be relatively certain that we are using TurboTax appropriately.
I think that we probably won’t use another preparer until we move again, in which case we’ll have to deal with moving expenses, reimbursements, etc from the company. Thus unless you have a net worth of 7 figures, at least a million dollars, then I think it’s not worth hiring a CPA. TurboTax is more than adequate in filing your taxes.
This is a guest post from over at LivingAlmostLarge. A Personal Finance Blog. For more from her, go to her site LivingAlmostLarge.
Thanks again LAL.
Again, I want to invite any and all guest post on this subject. I want to hear from all bloggers or just readers with their own input. Let’s see what you see I am missing. If you have some words of wisdom on this subject please let us share it with everyone, if it is something that has already been covered, so what, I am looking for others to tell what they know or have learned about finding a paid preparer. Repetition drives the point home.
A few personal notes from me (taxguy). The last time I had heard the franchise I address regularly as HeRBert (H & R Block), are only given a 9 weeks of training with six of those being trained how to move around the software being used. If it is now 12 weeks (it has been awhile since I received my information), I wonder if 1/3 of that time is still being used to train only on software navigation.
Before anyone ask – Star Trek fans should know what I mean by “HeRBert”.
If you’re not a fan, then it is from the Original Star Trek series:
Episode # 75 titled “The Way to Eden”.
My favorite quote from the episode “Tell Herbert, it’s no go!”
And a bit of script from the episode:
Kirk: What does ‘Herbert’ mean?
Spock: It is, um, um, somewhat, uh, uncomplimentary, Captain. Herbert was a minor official…notorious for his rigid and limited…patterns of thought.
Kirk: Well, I shall try to be less rigid in my thinking.
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