An IRS audit is one of the most dreaded events on the planet. It fills the heart with dread knowing the potential penalties for even an innocent misreporting or mistake. Each tax return is rated by a computer scoring system called the Discriminant Function System (DIF) System. It rates each return on the potential for change, compared with similar returns.

Income

Failure to report all income from W-2s and 1099s will trigger an audit. Employers must supply workers with a W-2 and they’re also required to provide a copy to the IRS. The same is true for independent contractors that receive a 1099. The IRS knows from employer records that an individual has received the income and failure to report it will result in an audit.

Earned Income Tax Credit

A surprising number of low-income earners are audited each year that claim the Earned Income Tax Credit (EITC). The program has a long history of fraud since taxpayers can receive money back when they claim it. The EITC is designed to help qualifying low- and moderate-income families reduce their tax liability and, in some instances, increase their refund.

Self-Employed

Independent contractors, sole proprietors, and those engaged in the gig economy are a collective group that are highly scrutinized and even the smallest anomaly will trigger the DIF System. It especially looks at income compared to business expenses that are claimed. Individuals are entitled by law to claim allowable work-related expenses, but should be sure they’re actually work related.

Hobby vs Business

The IRS has very clear rules about what qualifies as a hobby and what’s considered a legitimate business. Claiming a hobby as a business allows individuals to claim business expenses, but it doesn’t quality as a business according to the IRS if a net profit hasn’t been reported in the prior 5 years.

High Income

The more money an individual makes, the more loopholes there are in which to hide assets and income. Those with incomes of $1 million are more likely to be audited than other income brackets. If a business suddenly starts posting a significant amount of income or losses, the owners can expect to be audited.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

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Oh no! You need audit advice. You just received in the mail a notification that you are going to be audited by the IRS. What now? How do you respond to this and should you be having a heart attack now? While many people lose it as soon as they realize that the IRS is going to be asking for their records and proof, the fact of the matter is that the best audit advice is to stay calm and gather the information that you need carefully, accurately and without worry. 

Make a Call

Before you put it to the side and decide to deal with it later, (it won’t go away by the way) take the time to respond to it. Give the IRS a call and find out what is going on and when they want to come and see your paperwork. This simple phone call can help you find the right information before you react the wrong way. Remember, it’s not the fault of the lady on the other side of the phone, that this is yours either. So, be nice, play fair and be honest. 

Need more Time?

Do you need some extra time to get your information in order? Need to dig out that box, organize it and hope that it’s all there? Then make sure to ask for a postponement of the audit. This audit advice is very important: don’t wait until the last minute to do it either! Call them up and ask for a small delay so that you can get things in order. Simple, done. 

Don’t Panic

Lastly, it is important to realize that most audits are simply needed because of minor errors. You added or subtracted wrong. You entered the wrong information on the wrong line. That type of thing occurs every day. This audit advice is to be honest about what is happening with you. So, you made a mistake. Fix it by providing a good attitude to the IRS auditor that comes to see you.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

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Most audit reports on financial statements give the business a clean bill of health, or a clean opinion. At the other end of the spectrum, the auditor may state that the financial statements are misleading and should not be relied upon. This negative audit report is called an adverse opinion. That’s the big stick that auditors carry. They have the power to give a company’s financial statements an adverse opinion and no business wants that. The threat of an adverse opinion almost always motivates a business to give way to the auditor and change its accounting or disclosure in order to avoid getting the kiss of death of an adverse opinion. An adverse audit opinion says that the financial statements of the business are misleading. The SEC does not tolerate adverse opinions by auditors of public businesses; it would suspend trading in a company’s stock share if the company received an adverse opinion from its CPA auditor.

One modification to an auditor’s report is very serious – when the CPA firm says that it has substantial doubts about the capability of the business to continue as a going concern. A going concern is a business that has sufficient financial wherewithal and momentum to continue it normal operations into the foreseeable future and would be able to absorb a bad turn of events without having to default on its liabilities. A going concern does not face an imminent financial crisis or any pressing financial emergency. A business could be under some financial distress but overall still be judged a going concern. Unless there is evidence to the contrary, the CPA auditor assumes that the business is a going concern. If an auditor has serious concerns about whether the business is a going concern, these doubts are spelled out in the auditor’s report.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

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Despite what individuals may have been told in the past, an audit by the Internal Revenue Service (IRS) isn’t random. The IRS utilizes a state-of-the-art software program to flag tax returns for auditing. The software is called Discriminate Income Function (DIF). It flags returns for investigation by comparing the deductions an individual or business takes compared to others that are within the same income bracket.

There’s no reason taxpayers should be afraid to take the deductions to which they’re legally entitled, as long as they have the appropriate documentation to support what they’re claiming. There’s no foolproof way to be protected against an IRS audit, but there are steps individuals can take to minimize the potential.

Targeting Factors

Some jobs, careers, tax brackets, and geographical locations are more likely than others to be targeted for an audit, along with the very rich and the very poor. Individuals with an annual income of less than $25,000 have an audit rate of about 0.69 percent, a figure that’s 50 percent higher than all others.

Areas with a large African-American, Hispanic, Native American, and poor population are audited more. People that regularly receive tips such as hairdressers, waitresses, and bartenders are audited with more frequency, along with accountants, doctors, and attorneys that typically keep their own books. It’s a good idea for anyone in these categories to avoid miscellaneous deductions.

Self-Employed & Small Business

Small businesses and the self-employed are favorite IRS targets. Many choose to incorporate or form a limited liability company as they’re audited less often. File any pertinent worksheets, avoid amendments, know when to file, and hire a professional to prepare tax returns.

Know What’s Questioned

Keeping exemplary records is critical. Home office deductions, medical expenses, casualty losses, and business costs for travel, entertainment, and meals are some of the most often questioned.

Neatness Counts

Being neat really does make a difference. Returns that are difficult to read or have blank lines are more likely to be audited. It’s better to use a zero on a line than to leave it blank.

Do the Math

Use a calculator, double check the math, and make sure federal and state returns match. For those that use online tax preparation software, if it says there’s a problem and something needs to be revisited – pay attention.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

Contact Us Today