There is just some good news that has to be shared! The overall Internal Revenue Service audit rate is now down to only one in every 170 returns filed (.59 percent).
Partly, this is a direct result of e-filing and automatic matching/correcting software at the IRS. Errors such as incorrectly reported income (matching 1099s, W-2s, K-1s, etc.), incorrectly reported estimated tax payments, not reporting the Obamacare form 1095-A and computing any credits to pay back, not having matching Social Security numbers of dependents, errors in matching alimony deduction to alimony income, etc. — all of these types of preparation problems (and others, too) used to be left up to random chance of being caught. Now they are fixed at almost 100 percent of all instances, being automatically corrected by IRS’ computers without the intervention of a single human being.
The IRS also has improved its “red flag” processes to focus its attention on returns that have items on them that act like waving a “red flag” at the IRS, such things as taking higher than average deductions; claiming large charitable deductions, especially non-cash; running a small business (schedule C) that has a loss, especially if there is wage income that is large enough to make the small business start to look like a “hobby” (no losses allowed for “hobbies”); reporting foreign income exclusion or large foreign tax credits; virtual currency transactions; S-Corp shareholders deducting losses in excess of their capital contributions; owners of oversea bank accounts; reporting large losses in other areas such as rentals, asset disposition, etc.
Also, certain types of businesses get extra attention. Restaurants, construction, home-based distribution (Amway, Scentsy, Plexus, Norwex, Essential Oils, etc.), horse breeding, racecars, sharing (Uber, Lyft, Air BnB, etc.) … basically all types of business activities that the IRS has discovered that a high likelihood of deliberate (and accidental) underreporting of income and overreporting of expenses occurs.
So, there you have it. Keep your returns accurate, don’t miss reporting any income, use the correct forms to report everything, don’t be greedy causing you to stand out and your chances of being audited are pretty small. Of course, if you do happen to get audited, you should already have good records to back up all your deductions.
Did you hear? Deuteronomy 12:28 says, “Be careful to obey all these words that I command you, that it may go well with you and your children after you…”
Kelly Bullis is a certified public accountant in Carson City. Contact him at 775-882-4459, on the web at bullisandco.com and on Facebook.