IRS Audits On The Rise

Posted in: News, Tax

In recent months, the IRS has contacted an increasing number of our clients to audit their tax returns. We have not experienced this for many years. It appears the pressure from the US Senate and Congress to crackdown on delinquent taxpayers and fraudulent returns has had some effect. They intend to select 13,000 returns a year for a random audit.

One of the areas that the IRS is beginning to look at are small farms (Schedule F) with large losses that could be construed to be hobbies. We have been advising clients for several years to be less aggressive in this area. Now that we know the IRS is specifically targeting this area, we again urge you to take care. Whether you have a horse, llama or organic farm, winery or other agricultural endeavor, you must start showing a profit after a few years; if not, you may have a hobby, not a business.

Other areas that the IRS is targeting are:

  • Schedule A itemized deductions.
  • Eligibility for earned income tax credits.
  • Improper reporting of capital gains, including: vacation home sales, rentals, business property and farmland..
  • Overly generous tool reimbursement plans.
  • Mis-classified employees.  (Make sure your independent contractors are truly contractors not just employees.  Beginning next year, employees who think they have been wrongly classified as a contractor may file a special form with their tax return providing information concerning their employer to the IRS making it easier for them to catch violators.)
  • Schedule C, Profit or Loss from Business (Sole Prorietorship).
  • Under-reported income and inflated write-offs of sole proprietors.
  • S corporations and partnerships, especially S-company owners who take dividends instead of salaries to minimize payroll tax liability.