Allied Accounting Blog

The Tax Gap has the IRS on the fast track. The IRS will be auditing more and tougher.These are some examples of what’s coming in order for the Service to find and close the 300 billion-tax gap. These recommendations have come from lawmakers and the GAO who are convinced that the rate of noncompliance comes from individuals and firms and the gap is rising, so they say.

• Be diligent and make sure your Schedule C is audit proof. Do not you low-ball your income and increased your write-offs, a common practice that is an audit point and sometimes, in some scenarios it is more prudent to under report your expenses.
• Farmers especially those that are part-time and/or hobby farmers frequently using these losses to reduce their other income are being scheduled in the audit process.
• Itemized deductions on Schedule “A” where medical costs and charitable donations and job related expenses are under the microscope this year also.
• Employment tax dodgers will be hit harder as the service looks for the places in small business where popular schemes used all too often, have been used to avoid payroll taxes. The service believes that workers are misclassified as 1099 sub contractors. Sound familiar? It should this is not new but audits are up. And also on the hit list is an over abundance of employer reimbursements to employees.
• What about Per Diem rates. Make sure you are not taking more than the IRS allows on its schedule.
• Damages for nonphysical injuries are taxable to recipients. An Appeals Court has officially reversed last year’s ruling that it is unconstitutional to tax awards for mental distress and injury to a professional reputation. The full award is now taxable and not very good news for taxpayers who have filed claims for refunds bases on the Courts previous ruling (Murphy, D.C. Circuit). IRS will now deny those claims.
• Homebuilders will get special audit attention now, as revenue agents look for inappropriate income deferrals.
• Also the random audits will return and begin this fall. Remember those? Starting with 2006.
• Real Estate professionals and their loss deductions are going to be another subject for audit.

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