Your chance of an IRS tax audit is slim, only 1% of tax returns are subject to an audit, and 70% of those are by mail. I have been fortunate and have had success with IRS audits. My first line of action is to be proactive and avoid trouble.
However, recently I had the opportunity to work with a new client, who has encountered what I call an “audit horror story”. The taxpayer is defending two of the IRS’s favorite tax issues – travel expenses and hobby losses.
In regards to travel expenses if the taxpayer does not maintain and provide written records to the IRS, they can deny the entire deduction. At the absolute minimum, you must maintain a written record of your business mileage. If you are using credit card receipts, they must have the detail, not just the total of change and business name. You need to prove what was purchased to support the deduction.
Hobby losses are something else. Do you sell Mary Kay or vitamins, or plant Christmas trees? The hobby loss rules states that you need to report income 3 out of 5 years. If you don’t meet this test it gives the IRS permission to dig deeper. You need to prove to them that you are doing this for profit.
The sad part for the taxpayer is that once the IRS classifies it as a hobby loss, according to law it disallows the expenses to offset the income. The expenses are classified as itemized deductions and may not have a tax impact.
If you receive an IRS tax audit notice, we recommend you do the following;
- Contact the tax preparer to review the notice – earlier the better. Is the notice valid and can anything be done to resolve it quickly in your favor? As part of our service, we review any tax notice to assess the situation, free of charge. If we caused it, there is no charge for us to resolve it.
- Make sure you have all the records used to prepare the return and support your deductions. Can the issue be resolved by providing the documents to support your position?
- Arrange to have someone who is qualified represent you. They need to be able to legally do it and understand what is happening.
- Avoid meeting with the tax authority alone or at all.
The tax code can be very specific on language. You may provide support for their change without even knowing you did it. Tax law is not common sense – it consists of rules and guidelines. It is written in unending sentences and can refer to other areas of the law that are just as confusing as where you started.
A tax audit notice is not a life or death matter, even though it strikes fear into the hearts of many. It can be a challenging situation.
May the luck of the Irish be with you. I hope you avoid a tax notice!
Mary Guldan-Lindstrom
