The number of IRS audits increased in 2007. See my recent
article "IRS Ramps Up Audits" to read more about what is
causing this increase and who is targeted. What can you do
to be prepared?
#1 Build a defense for your rental real estate losses.
While the IRS has not specifically targeted returns that
deduct rental real estate losses, if you are selected for
audit, your rental real estate losses will be questioned.
If you claimed real estate professional status, the IRS
will ask you to prove that you qualify. If you claimed the
$25,000 loss exception, you will be asked to prove that you
meet the "active" threshold.
Here's what you can do:
First, make sure you clearly understand the rules for
taking your rental real estate losses. You can deduct
rental real estate losses to reduce you taxes but the rules
are very specific. Knowing these rules inside and out will
increase your chances that your audit will result in no
adjustments to your rental real estate losses.
Second, document your real estate activities. Proper
documentation is the number one defense you have. The IRS
wants to see not only the number of hours but also the
activity you were doing and for which of your properties or
businesses. Need help? I'm here to help you!
#2 Clean Up Your S Corporation
The number of S corporation audits jumped in 2007. The IRS
is looking at specific items; here are a few of those items
you need to be aware of:
- Your salary -
How much did you receive as salary and when did you receive
it? As an owner, if your salary is too little, you could
be in trouble. But from a tax planning standpoint, if your
salary is too much you will be overpaying your taxes!
There is a balancing point to master here.
The timing of when you receive your salary is important as
well. Big lump sum payments made once or twice don't look
like salary and could be drawn into question.
- Your distributions -
How much did you receive as distributions and when did you
receive them? Smaller distribution amounts that are paid
more frequently than quarterly don't look like
distributions. These amounts will be scrutinized!
Here's what you can do:
Your #1 defense is documentation. How did you come up with
your salary amount and your distribution amount? How did
you determine when you would pay your salary and when
distributions would be made? Once you have this
documented, you need to make sure what your S corporation
is paying is reasonable. So, take another look at your
salary and distributions and ask yourself if it makes sense
for a business to pay these amounts.
Not sure what your S corporation should be doing? Then you
are in the majority, that's why the IRS is having a field
day with these audits! I can help walk you through the
exact steps you need to take to determine your salary
amount, your distribution amount and how to document both
so you are ready for an IRS audit.
#3 Support Your Expenses
There are certain expenses the IRS will always look at in
an audit. These expenses are travel, meals and
entertainment.
The #1 thing you can do is to make sure you can support
these expenses. The IRS will want to see the who, what,
when, where and why of each of these expenses. Who was
there, what was the business purpose, when was it, where
was it and why was this an ordinary or necessary expense
for your business.
Not sure if your documentation will pass an IRS audit? I
can help!
By now, you realize the key to surviving an audit without
any adjustments is proper documentation. If you are among
the many who do not document as you should, it's not too
late! Even if your documentation has not been ideal in the
past, make a new start right now! Understand what you need
to document and then on a daily, weekly or monthly basis,
make sure your documentation for that day, week or monthly
is in order. Once you have the hang of it, go back and
start to document what you didn't in the past. Remember,
the IRS can audit a return 3 years after it has been filed
(and 6 years if the tax return filed was considerably
incorrect).
----------------------------------------------------
Tom Wheelwright is not only the founder and CEO of
Provision, but he is the creative force behind Provision
Wealth Strategists. In addition to his management
responsibilities, Tom likes to coach clients on wealth,
business, and tax strategies. Along with his frequent
seminars on such strategies, Tom is an adjunct professor in
the Masters of Tax program at Arizona State University. For
more information, please visit
http://www.provisionwealth.com
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