Accounting Practices to help Minimize the Chance of an IRS Audit
Most people fear death, failure, public speaking…and being audited by the IRS. Unfortunately…if Obama can get audited, so can you. There are no guarantees you won’t get audited, but the following recent statics released by the IRS should change your mind on the chances of never getting audited. Less than 1% of individual tax returns got audited in 2014, but this translates to roughly 1.2 million taxpayers that were audited. Even worse, schedule C filers (yes, I’m talking to you, Sole Proprietors in the Film/Entertainment world) have a much higher risk of being audited and the chances increase drastically as taxable income rises. That’s what we’re here for… to share some tips to help minimize your chance of the IRS “knocking on your door” one day.
Act as if you were being audited. Get in the habit (if not already) of keeping good records of all your expenses that you intend to deduct, because if you don’t, you can kiss that deduction goodbye. Without backup or record of said deduction, the expense is toast. A good way of keeping all these receipts, paperwork, etc. organized and in an orderly fashion is to scan them into pdf files. This leads me to the next tip…
Take advantage of technology and make digital copies of all your records. You can be green and save valuable storage space in your cramped NYC apartment. There are a ton of great (free) apps out there in the cyberworld that you can download right into your smartphone, IPAD, Droid, etc. A few of the more popular apps to scan receipts are: Expensify, Shoeboxed, CamScanner and Genius Scan.
Be your own bookkeeper and track all of your expenses and income using Quickbooks online or even Microsoft Excel instead of jotting your financial information down on a crumpled up coffee shop napkin. This will also save you on accounting fees if you hire an accountant (ahem) to prepare your tax return for you since you will save them time reviewing/analyzing your records.
Don’t Get Greedy
An easy way for you to be the “chosen one” and get audited is to not report all the income you earned. This is a serious “no-no.” The IRS has a matching program that matches your social security number to all 1099’s and W-2’s that are issued to you. So, if you forget to report one, they will be sure to let you know.
Don’t make up or exaggerate your expenses. The expenses that the IRS loves to target are: Meals & Entertainment, 100% business use of vehicles, large charitable deductions and home office deductions. As I mentioned before, if you don’t keep supporting documents of your expenses, kiss them goodbye. But if you do keep good records, then you should feel confident reporting them.
Also be aware of the “Hobby loss rules,” which the IRS created to prevent Schedule C taxpayers from starting businesses to primarily incur expenses they could deduct from their personal tax return. The rule states that your business should show a profit three out of five years.
Know Your Tax Deadlines
Another easy way for the IRS to find you is non-compliance. If you miss any of the tax deadlines or even worse, not file at all, you’re giving the IRS a good excuse to come looking for you. The following are some of the key tax compliance deadlines to know:
- Individual tax returns (Form 1040): 4/15, 10/15 (if extended)
- Please note, filing and Extension is an extension to FILE, NOT PAY. Tax is ALWAYS due by 4/15
- Partnership tax returns (Form 1065): 4/15, 9/15 (if extended)
- S-Corp/Corp tax returns (Form 1120S/1120): 3/15, 9/15 (if extended)
- Quarterly estimate payments: 4/15, 6/15, 9/15, 1/15
Keeping the IRS from digging into your pockets is not an easy task, but it can be if you follow some of these tips. If you have any questions, please feel free to reach out to a member of Withum’s Sports & Entertainment group.