TAXING TIMES, JULY/AUGUST 2014 EDITION
By Rick Torkelson, CPA and principal of Torkelson & Associates, LLP in Petaluma, CA
BEWARE! The scammers are out in force. Recently, we have received several reports of threatening calls from the IRS demanding cash to satisfy taxes due.
The IRS does not initiate audits by phone. The IRS faithfully follows a slow methodical procedure from initiation of an audit through the collection process.
Do not respond to cold calls claiming to be IRS agents demanding money. If you have been audited with adjustments made and sent to collection, you would know it. This process takes weeks and usually months to slowly resolve.
The following excerpt comes directly from the IRS website:
If you get a phone call from someone claiming to be from the IRS, here’s what you should do:
• If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.
• If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.
• If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.
The IRS Audit Process
Let’s get real and talk about the IRS Audit. If there is one thing that both Democrats and Republicans agree on, it’s keeping the budget very tight for IRS audits. The fact is audits are relatively rare. If your taxable income is less than $200,000 your chances of audit is about 1 in 114. Even if your taxable income is over $1 million, only 1 in 9 gets a closer look.
The process starts with a letter from the IRS letting you know you have been selected for examination and gives you names and contact numbers and about 10 days to call to set up an appointment. Generally these appointments are set over a month away. The letter typically states specific items the agent wants to examine such as “Gross Receipts”, “Vehicle deduction”, or “Mortgage interest”. Years ago, if you were picked for examination, the IRS would look at nearly every item on your return. Now they just pick a few hot items and if you get through that first wave without significant changes, it ends there.
I will list a few hot audit items that seem to get examined every time there is an audit along with a few comments.
Gross Receipts: You will be asked to provide all your bank statements for the year under exam including the December before and the January after. The agent will add up all the deposits and compare them to the income reported on the return. If your deposits are greater, you will asked to explain the non-taxable deposits.
Vehicles deductions: If you deduct vehicles in your business or use your vehicle for your job (other than commute), the IRS will nearly always examine this deduction. Although day to day auto logs “contemporaneous” are not specifically required, it has been my experience that given a greater than 50% deductible use of a vehicle, a day to day record is pretty much required.
Travel: If you have a big travel deduction, an examination will likely take a look at it. First you have to show that the primary purpose of the travel and all the expenses deducted was for business purpose. Then you would have to prove that you paid for the expenses.
For the average taxpayer – work for wages, paying a mortgage on your house and deducting some property taxes and contributions, there is almost no chance of audit – and if you do get one, it will be fast and painless. The IRS already knows your most major numbers – your wages, your withholding, your interest on your house. Even the property taxes you pay are a public record – There’s nothing to audit.