Most of us would rather face root canal than obtaining the dreaded letter from the IRS with the word AUDIT!
Being audited promotes fear and anxiety to all taxpayers, however, it is mostly detrimental to those “middle class” common folk who prepare their own 1040s without the guidance of a professional tax accountant.
About 1.5 percent of taxpayers making less than $100,000 (combined income) are audited. The audit rate jumps to 6% for those with Adjusted gross incomes exceeding $1 million. But lets face it, people making over $1 million have plenty to spend on financial planners and personal accountants.
If you plan on preparing your own 1040 this tax season, with the assistance of a tax bought software, be aware of certain these two “hot” buttons or triggers which raises IRS warning flags.
MEALS AND ENTERTAINMENT
Although you are entitled to deduct up to 50% of costs for meals and entertainment as a business expense, certain criteria must be met. Otherwise Uncle Sam will come knocking. First, meals and entertainment is a business deduction for the purpose of wooing new clients. It is not intended for personal or recreational leisure time with a casual business stock comment!
If the purpose of the meeting is not business related, the deduction cannot be substantiated. Next, you must keep solid records of dates, times, receipts, and even discussion logs to fairly claim the expense. If you are entitled to the deduction kudos to you, but if not, it is not worth the risk of having the IRS investigate.
NON-CASH CHARITABLE CONTRIBUTION
Be careful with this one. Although you may feel compelled to donate the costly coat that you only wore once, or the toys which the kids never really played with, you cannot simply assign a value to it! The painting sitting in your attic, which belonged once to grandma, is probably not worth as much as you think!
Non-cash charitable contributions are deductible, but the fair market value of the items need to be determined, and it is not an easy calculation. You need to keep a receipt from the organization showing the name of the organization, the date, and a reasonably detailed description of the property. No- cash charitable contributions are deducted on Schedule A in the same section as cash contributions. If the non-cash charitable contribution exceeds $500, you will also have to attach form 8283 as well.
John Schetelich A graduate of Seton Hall University with a degree in accounting, John Schetelich has been preparing income tax returns for small business owners for over 20 years.