Everyone dreads IRS audits. The best way to deal with IRS audits is to avoid them. Stay in the IRS’ good books. Don’t do anything that might raise red flags with Uncle Sam. The bottom line is to prepare an accurate tax return. Here are some simple mistakes people make on their tax returns that are common causes of IRS audits. Click here to read or watch more IRS Help resources.
- Not listing all Forms 1099-INT, Interest Income, on Schedule B, in such a way that the computer or unskilled IRS worker could find the interest income on the return.
- Not listing all Forms 1099-B, Sale of securities, on Schedule D. The most common mistake I’ve seen people commit is the failure to report the transfer of money from one mutual fund to another mutual fund.
- Not listing all Forms 1099-DIV, Dividends, at gross dividends on Schedule B and deduct the non-taxable distributions and capital gains distributions.
- Not reporting all Forms 1099-MISC, Miscellaneous Income, on the appropriate schedule. Also, listing non-employee compensation with wages and failing to complete a Schedule SE, Self-employment earnings triggers audits.
Another thing that causes IRS audits is mixing personal and business expenses such as meals, entertainment and travel. The IRS presumes all expenses being claimed as tax deductions are personal unless you can prove otherwise with documentary evidence. The same goes with the use of certain assets. Many business owners mix use cars, mobile phones, home computers, boats, hunting leases, and vacation homes. Each mixed-use asset carries with it stringent, detailed record keeping rules.
When you are audited, the IRS agent will want to see not only canceled checks and paid receipts or invoices, but also copies of insurance policies, contracts, calendars, logs, travel and conference agendas, journals, and diaries. Section 280F, 280A, and 274 of the Internal Revenue Code require car logs, logs of vacation home use and who, what, where when and why of all travel, meals and entertainment. The IRS will request to see the actual hotel bill and not merely the credit card receipt. Credit card statements and canceled checks also need to be further supported by the actual receipts.
Even though you don’t have to have a receipt for an expense under $75, you still have to write down detailed information such as the date, time, place, name, and business purpose of the expenditure.