Anyone can be the subject of an IRS or NYS tax audit.
However, it is safe to say that you want to decrease your chances of a tax audit.
Below I reveal seven (7) of the most IRS and NYS tax audit triggers that I see when I am defending an unsuspecting taxpayer against either the Internal Revenue Service or New York State Department of Taxation and Finance.
If you require assistance with an IRS or NYS tax matter, please reach out to us. We can assist you regardless of location.
Large Deductions on Schedule C
Self employed taxpayers and business owners are subject to a higher IRS and NYS tax audit risk.
The reason behind many audits with the IRS is that the taxpayer is taking home office deductions, travel expenses, or automobile expenses that are not in line with what the Internal Revenue Service considers appropriate under their scoring system.
The IRS uses a computer scoring system that determines what your deductions should be based upon your occupation or other factors.
When you take a deduction that may not be in line with what the IRS considers appropriate, your income tax return may be flagged for an audit.
Failing to Maintain Adequate Books and Records
You will need to verify most deductions with receipts during a federal or NYS tax audit.
Failing to maintain adequate documentation of your expenses may result in a difficult federal or NYS tax audit.
We can help you determine the best course of action in defending your federal or NYS tax audit.
Mileage & Vehicle Expenses
If you use your vehicle for business purposes, you are required to maintain a mileage log to substantiate your business mileage.
However, very few self employed individuals actually log their mileage.
The IRS will require you to have the date ; the business purpose of the trip; and the amount of miles documented.
Recreating a mileage log at the time of the audit is often a challenge.
If you're in a profession that requires a lot of driving, such as a realtor or a salesperson, it is recommended that you use an app on your computer or smart phone to record your mileage.
Large vehicle expenses can flag income tax returns for an audit.
You need to maintain receipts for repairs to your business vehicle.
Also, if you use the same vehicle for personal use as well as business use, there needs to be an allocation of use for each purpose.
Failing to Report All of Your Income
If you are a W2 employee, your reported earnings match those earnings submitted to the IRS. Therefore, employees have a lower audit risk when it comes to issues pertaining to income.
When you are self employed, employment sources may be more than just one source of income.
The IRS and NYS will compare what your employers as well as anyone you worked for on an independent basis reported to the IRS as income to your income tax returns.
If the “numbers” don’t match, you may be flagged for a federal or NYS tax audit.
For example, let’s say you work as a school teacher and you work part time as a real estate agent.
You would receive a W2 for your income as a teacher and you would receive 1099 income for any sales that you may have made.
You would be required to report the additional income on the Schedule C of the income tax return along with the appropriate deductions.
Failure to report the additional income would result in a notice from the IRS pertaining to adjusting the tax return for the additional income and possibly an audit.
High Income Non Filers
The IRS is actively pursuing taxpayers with income over $100,000 per year that have not filed their income tax returns.
The IRS will send you multiple notices pertaining to the non filing of your income tax returns and advising you of your legal obligations to file an income tax return.
Failure to file an income tax return will result in the preparation of a Substitute of Return for you and in some cases, criminal prosecution.
Filing Late Income Tax Return(s)
In most cases, the filing of a late tax return, in or itself, does not trigger an audit so long as the income tax return is properly prepared.
When individuals or small businesses are preparing income tax returns that have not been filed in several years or perhaps late filing a tax return, the income tax returns may be prepared in a hasty fashion.
Deductions may be taken without substantiation or oftentimes, we see that the income tax returns were not properly prepared.
Your late income tax return(s) may be subject to additional scrutiny so it is important that it is properly prepared.
In our experience, we see tax returns that have been “self-prepared” by the taxpayer have the highest risk of either an IRS or NYS tax audit.
Not Filing Required NYS tax returns
Did you file a federal tax return and reside in the State of New York?
If so, you are likely required to file a New York State income tax return.
Failure to file an income tax return with the State of New York may result in NYS creating a tax assessment for you based on your federal income sources.
If you ignore notices from the NYS Tax Department, you will receive a tax bill.
When you receive a tax bill from NYS and contact the Collection Department, you will likely be informed that your tax matter was referred to a specific audit division.
Also, some business owners may be subject to a NYS tax audit for issues relating to New York sales tax.
IRS & NYS Tax Audit Help
To decrease your chances of an IRS or NYS tax audit, do not violate rules one(1) through seven (7).
However, if you received an IRS or NYS tax audit letter, don’t go at it alone.
Don’t delay when you receive the notice from the taxing authorities about what the auditor will inspect and the papers you will need to present
The federal or NYS tax auditor knows the tax laws.
You do not know the tax laws and are at a huge disadvantage.
When the IRS or NYS notifies you that they will be auditing you, the first step to putting either an IRS or NYS tax audit behind you is to get the proper representation.
The federal and NYS tax attorneys of the Tax Problem Law Center may be of help.
