More than 1.4 million Americans were audited last year, a 10% increase over last year. Even more audits are expected as the Obama administration plans to spend $8.2 billion in tax enforcement initiatives in 2011.
More than ever we need to be diligent in keeping accurate documentation for all tax deductions taken. Upgraded computer systems at the IRS are tracking and matching more tax documents than ever before.
Self-employment income is an area of great scrutiny by the IRS. More people are trying to turn hobbies into businesses. It is important to maintain a separate bank account for the business and keep accurate and consistent records of income and expenses. To be considered a for-profit business, the gross income for any three of the most recent five years must exceed the deductions taken for the business. If the IRS determines that a business is not engaged in for-profit, you won't be allowed to take deductions of more than the gross income from that activity. Travel, entertainment and automobile expenses are especially scrutinized.
Large charitable donations on your tax return is another high risk area, especially if the amount donated is high relative to your income. Determining the value of non-cash items such as artwork, cars, clothing and furniture can be difficult. For most items valued over $500, the IRS will require a qualified appraisal. Make sure you have the receipt when taking a charitable deduction, and for any donation of more than $250 be sure to get a letter from that charitable organization.
Higher income individuals are at greater risk of an audit. The IRS reported that audits of individuals earning more than $200,000 jumped 11% in 2009, and audits of those making more than $1 million surged nearly 30% last year from 2008. Hiring a good tax accountant can be a smart move. The more complicated a tax return, the more cost-effective hiring professional help becomes.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).