By Ron Piner
Let's not be afraid of the Internal Revenue Service. I know that most people are deathly afraid of an audit but I have to tell you, in most cases this fear is unjustified. My personal belief is that there is no longer such thing as the random audit. The IRS must develop audit programs designed to check on tax compliance issues of a certain nature. Does your income tax return fit one of these IRS audit issues? Will filing an extension eliminate the chance of having your income tax return selected for audit? Read on my friends, let the truth be known.
If you use a tax preparation service like H&R Block or Jackson Hewitt, don't let them sell you the audit insurance package. You just won't have any audit issues. Each year, the IRS identifies areas of compliance concerns and focuses on selecting a sample of these returns for review. Once upon a time, there was an audit program designed to check on those taxpayers running businesses (as sole proprietorships) at losses. If a taxpayer had W-2 income from another source and was running a business he owned at a loss, he did become prime target for an audit. Please keep in mind my friends, just because you are audited doesn't mean you are doomed to pay huge tax bills with interest and penalties. They are just making a compliance check and reviewing your specific set of facts and circumstances. I had a client that was subject to this audit program I mention (which is why I am familiar with it) and had a favorable outcome.
My client worked as an employee receiving a W-2 from his employer. In addition, he had a sideline business doing art work on T-shirts. The year in question had his business losing $5,000 on form schedule C (sole proprietorship return). This is what attracted the IRS' attention. In previous years, my client made money in his home-based part-time business and paid not only income tax, but paid self-employment taxes. The audit was really just a quick visit to the local office of IRS to resolve the issue. The result was no change. Home -based business need not be afraid as I would ask you to review the hobby activity rules. If one runs a business and has income for a 3 out of a 5 year period, the burden of proof falls to IRS to demonstrate that the business is not seeking profit. If this 3 out of 5 year test is not met, the burden falls to the taxpayer to demonstrate that the business is seeking profit. There is a 2 out of 7 year test for those engaged in businesses involving horses. There are plenty of ways to convince IRS that there is a profit seeking motive even if there has been no income for an extended period of time. In the early years, a taxpayer can file for 5213 with their returns asking IRS to hold off any audit activity regarding businesses until the five year period (seven for horses) is exhausted. I have never prepared one of these forms and would likely not advise anyone to do so. Just no the form is available.
S corporations owners are at risk of being audited these days. The IRS has determined that 57% of all corporate income tax returns filed are S corporations (see my article "Attention All You S Corporation Owners"). Others of us will likely slip into anonymous income tax status. As far as filing extensions is concerned, at best they will delay an audit that is inevitable due to the fact that the return meets an IRS audit program. I speak from experience on this issue as I felt that a client of mine had an audit issue. I put the return on extension, and the return was audited anyway, just a year later.
Rest easy my friends. It is not likely that you will get selected for an audit. If you do have a return with one of these audit sensitive issues, just make sure you mind your p's and q's and everything will be alright in the end.
Ron Piner, CPAHost of "Better Business"Saturday Mornings at 10ETON WBIS AM
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http://www.wbis1190.com/ www.mwibonline.com taxguy9@hotmail.com
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