What May Trigger An IRS Audit?

The IRS often audits returns for the following reasons:

  • Unreported Income - The IRS matches the W-2s and 1099s (Interest, Sale of securities, Dividends, and Miscellaneous Income). Taxpayers are generally contacted if they have not reported a 1099 or W-2.
  • Travel and entertainment deductions - The Intemal Revenue Code requires who, what, where, when and why of all travel, meals and entertainment. The IRS wants to see the hotel bill not just the credit card receipt. This is a prime audit target.
  • Large charitable gifts - Can be suspicious if disproportionate to your income.
  • Home-office deductions - Deductions are often claimed by taxpayers who do some work at home but don’t qualify for a home office.
  • Cash businesses - The IRS is more likely to audit returns of businesses dealing in cash.
  • Hobby losses - enerally, only losses Hom a bona lide business are deductible.
  • Foreign bank accounts - The IRS is pursuing Lmreported income from offshore accounts.

What are your chances of an IRS Audit?

According to figures recently released by the IRS, approximately 1.11% of all 2010 individual tax returns were audited in 2011, the same as in 2009. The rate has hovered around 1% for several years.

The IRS audit rate is 1.02% for taxpayers with income of less than $100,000. For those with income of $200,000 or more the audit rate increased to 3.93%. or roughly one out of every 25 returns. Audits jumped to about one out of eight for income above $1 million.

Your responsibility to prove

The responsibility to prove (substantiate) income, deductions, and statements made on your tax returns is known as the "burden of proof." Records such as receipts, canceled checks, and other documents that support an item of income, a deduction, or a credit must be kept, but you may choose any record keeping system that clearly shows your income and expenses.

Health Care Tax Benefits

With all the talk this year about medical costs and government benefits, it is easy to lose sight of the basic health care tax benefits already provided by Congress.

In 2012 taxpayers who itemize deductions on their tax return can deduct medical costs exceeding 7.5% of their (AGI) adjusted gross income, (increasing to 10% for taxpayers under age 65 in 2013).

Here's a tip: What counts is when you paid the bill, not when the treatment or prescription was received.

Types of costs that qualify for the medical deduction

Eligible expenses include those required to treat, prevent, or mitigate a disease or other medical condition. Such costs include prescription drugs, hospital bills, and premiums paid on health and dental insurance. And these costs can be incurred on behalf of yourself, a spouse, or a dependent. Just be sure to keep all applicable receipts to substantiate your expenses.

A deduction often overlooked is travel expenses incurred to receive medical care.

  • Travel by car: You can either deduct actual out-of-pocket expenses or the medical mileage rate of 23¢ per mile.
  • Lodging expenses for medical care are limited to $50 per night. You can include lodging for a person traveling with the person receiving the medical care, (a parent traveling with a sick child, up to $100 per night). Lodging is only deductible if the medical treatment is received from a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital and the lodging is primarily for or essential to the medical care received. Meals are NOT deductible.

Non-deductible Costs

Non-deductible costs (merely beneficial to general health) include:

  • Babysitting expenses to enable parent to visit a doctor
  • Hair transplant
  • Health club dues
  • Hygiene supplies
  • Illegal operations and treatments
  • Imported prescription drugs
  • Insurance (accidental loss of life, limb, loss of earnings during disability)
  • Marriage counseling
  • Maternity clothes
  • Medicines and drugs from other countries
  • Nonprescription drugs and medicines
  • Nutritional supplements, including vitamins
  • Trips, for general improvement of health
  • Weight loss program to improve appearance

To further explore your deduction options, contact our office.

A Buy-Sell Agreement Helps You Plan for Contingencies

What would happen to your business if you die, retire, or become disabled? With a "buy-sell"agreement, you are able to plan for many contingencies over which you would otherwise have little control. A buy-sell agreement is a contract between the business entity and all the entity's co-owners. The agreement typically covers valuing the business, identifying events that would bring the agreement into effect, and defining the transfer of ownership.

The advantages of a buy-sell agreement include:

  • Providing a framework for a smooth transition of control to successor(s).
  • Facilitates estate planning objectives; can help minimize certain estate taxes and can be structured to take advantage of favorable redemption rules upon death.
  • Fixes value for estate tax purposes; includes a method for valuing ownership interests and establishing a fixed value for the estate upon its owner's death.
  • Forces owners to deal with liquidity issues; how would a buyout be funded.
  • Helps prevent loss of tax benefits - especially for S corporations in which transferred stock could lead to termination of the S election. It can disallow the transfer of shares without the consent of owners.

Something as valuable as the ownership and management of a small business should not be left to chance. The buy-sell agreement needs to satisfy all parties involved, including the IRS requirements for tax purposes. For assistance with the tax consequences of a buy-sell agreement or a tax review of your current buy-sell agreement, please contact us.