Small Business Audits Increase
Here is a summary of an article that was in Tierra Grande from Texas A&M University
Early last year the IRS said they had audited slight more than 1% of the 143 million 2010 tax returns. The rate varied by adjusted gross income. The 1 % of audits were mainly in the $200,000 or less category. However for $200,.000 to $500,000 the audits increased up to 3 to 12% , the audit rates for people making over $5M went up to 21-30%. The probability of an audit can be alot higher depending on the size and type of the income and deductions on the tax return.
In 2011, audit rates on small business and sole proprietorships ranged from 1.3-4.3% depending on the income levels. These higher rates directly affect real estate professionals who are self employed. During 2011, the IRS audited $278,000 sole proprietorships which was 18% of all audited returns filed by individuals. Based on the statistics the IRS seems to believe that most owners under report income and over report deductions or a combination of both.
Approximately 75% of the audits in the $25,000-$1000,000 category resulted in assessed taxes averaging $8000.00 For $100,000 to $200,000 income category and average of $18,000 additional tax was assessed on 69% of the audited returns. With the assessed taxes there are typically interest and penalties involved. As a taxpayer, you have the option to appeal the amounts through the IRS administrative system and if that doesn’t work you can go to court.
As a taxpayer you are allowed to deduct legitimate expenses , if you are audited however you must provide a paper trail of proof . For a Real Estate professional, you must carry documentation for travel, food , home office , auto etc. So it is key you have a system to capture your receipts, I use an accordion file to file all the receipts for every month and track the expenses on Q books. Specifics on how the IRS decides on whom to audit are not made public. If there is an atypical tax return , the IRS uses a scoring system called a DIF score the higher the score the higher the probability you will get audited. The equation that figures the DIF score is secret and it not known by the public. Always use a competent accountant and keep your receipts!