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| How to triumph over an audit? |
There are a number of ways a small business can become targeted for an audit by the IRS. Some of the most common are DIF Scoring, Examination Referrals, and Document Matching.
It's essential to understand why your business has been selected to be audited.
The "discriminant index function," or "DIF," is a computerized score assigned to filed returns. The mathematical formula used to derive this score is not revealed to the public, but
the higher the score the more likely the audit. Factors such as reported deductions being higher than reported income are red flags. Audits of a related party can also trigger an audit for you. (i.e. If the IRS sees that company XYZ made payments to ABC Inc., they may check if the payment was reported by ABC.) In addition to these practices, the IRS also matches income reported by the payer on 1099 or W-2 forms to the payee's individual tax return to ensure the income is reported.
So, need some help? Hire a professional CPA with experience in IRS Representation. Call GBC Audit Services for help now at 678 366-9232!
And take some advice from a former IRS Agent's angle:
- DISPUTE THE "HOBBY LOSS" THEORY: According to the Internal Revenue Code Section 183, deductions are limited when an activity is not engaged in for profit. This is known as the "hobby loss rule." If business losses have been disallowed due to the hobby loss rule, it is essential to prove both a business profitability strategy (marketing plans) and prior success to show that the current losses are temporary.
- CLAIM MISSED DEDUCTIONS: Many business owners may not know it, but an audit is also a great time to submit documentation for overlooked deductions. Such deductions may reduce the taxpayer's liability or possibly generate an overpayment of taxes, which can offset any deficiencies determined by the IRS.
- BE CREATIVE IN SUBSTANTIATING YOUR DEDUCTIONS: Keep in mind that the IRS allows for third-party documentation, oral testimony and other forms of verification substantiating expenses, so if your business lacks documentation to support business mileage reported, consider using Google maps, clients' records and past invoices to estimate mileage. Another example would be if you no longer have receipts or documentation for certain expenses claimed, take the time to retrieve prior bank records or credit card statements. It is also beneficial to make contact with vendors to request proof of payment.
- GET PROFESSIONAL HELP: If you feel overwhelmed by the mere mention of the IRS, it may not be a bad idea to get a tax attorney, accountant or enrolled agent to fight on your behalf. That way, you can remove yourself, emotions and fears from the equation completely. Begin by submitting Form 2848, "Power of Attorney and Declaration of Representative," to the IRS. They will be required to make direct contact with the agent on your behalf.
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Call GBC Income Tax Services today at 678-366-9232 for all your tax and IRS needs!
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