TAX AUDITS

4 Steps to Prepare for an IRS Audit

September 28, 2017 by Reynolds & Rowella Leave a Comment

Most of us will never be audited. But when it does happen, it might feel a little scary. The truth of the matter is IRS auditors do audits every day. They know what to look for and can ask questions that you may easily answer incorrectly. Here’s how you can be more prepared if it happens to you:

• Respond to the IRS in a timely manner. Do not let it get to a point that a face-to-face examination is required.

• Ask for help. Do this right away. Too many clients think the problem is easy to resolve, but inadvertently say the wrong thing or open another audit issue inadvertently.

• Know what is being asked. Clearly understanding the core question can simplify the solution. Why is the auditor asking to see your 1099s? Is it regarding a form you don’t have? Is the auditor asking about your small business profits because he/she thinks your business is a hobby?

• Understand how the auditor has been trained. The IRS has certain areas in which it focuses training for its auditors. These are published in Audit Technique Guides (ATGs) and are available for review on the IRS website. The ATGs can be helpful in identifying areas for potential audits, as well as help you understand what the IRS likes to question.

Even if there’s only a small chance that you’ll be audited in your lifetime, it can be helpful to know how you can prepare for it if it happens to you.

Need help responding to an IRS Audit? Contact us at consulting@reynoldsrowella.com we are here to help.

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What is Fair Market Value (FMV) Anyway? Tips to defend in case of an IRS Audit

September 20, 2017 by Reynolds & Rowella Leave a Comment

So what is fair market value (FMV)? According to the IRS, it’s the price that property would sell for on the open market. This is the price that would be agreed on between a willing buyer and a willing seller. Neither would be required to act, and both would have reasonable knowledge of the relevant facts.

This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes. It is also a definition that is so broad that it is wide open to interpretation.

Understand when FMV is used

Fair market value is used whenever an item is bought, sold or donated and has tax consequences. The most common examples are:
• Buying or selling your home, other real estate, personal property or business property
• Establishing values of other business assets like inventory
• Valuing charitable donations of personal goods and property like automobiles
• Valuing bartering of services, business ownership transfers or assets in an estate of a deceased taxpayer

Know how to defend your FMV determination

If the IRS decides your FMV opinion is wrong, you are not only subject to more tax, but also penalties. Here are a few tips to help defend your FMV in case of an audit.

Properly document donations.

Fair market value of non-cash charitable donations is an area that can easily be challenged by the IRS. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt confirming your donations.

Get an appraisal.

If you sell a major asset such as a small business, collections, art or capital asset, make sure you get an independent appraisal of the property first. While still open to interpretation by the IRS, this appraisal can be a solid basis for defending any differences between your valuation and the IRS.

Keep pricing proof for similar items and transactions.

This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar item to the one you sold, it can readily support your FMV claim.

Take photos and keep detailed records.

IThe condition of an item is often a key consideration in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount. And keeping copies of invoices for major purchases is also a good idea.
With proper planning, establishing FMV of an item can be done in a reasonably defendable way if ever challenged.

For answers to other tax questions you may have, contact us at consulting@reynoldsrowella.com

Reynolds & Rowella | IRS Audit

Tax Audits

June 8, 2017 by Reynolds & Rowella Leave a Comment

Tax Audits: Learn what auditors will look for when trying to prove your deductions so you are prepared.

Tax audits still remain relatively rare, but should you face one, be prepared for questions. Tax authorities tend to deny everything and then make you prove that your deductions are valid. Here are some suggestions.

To prove your deduction most auditors are looking for two required documents.

Receipts.

The receipt should clearly show the company or entity, the date, the value of the activity, and a clear description of the activity. In the case of donations, the receipt should also have a statement that confirms you received no benefit in return for your donation. It should also state that you are not retaining part ownership of the donation.

Proof of payment.

You will need a canceled check, a bank statement, or a credit card receipt and related statement.

Other proof.

In addition to the above, there are certain deductions that require additional documentation. Here are the most common:

Contemporaneous.

Any proof of payment and receipts should generally match the date of the activity. The IRS and state agencies are quick to dismiss receipts that are obtained after the fact. A good rule of thumb is to ensure receipts and proof of payment are received at the time of the activity. If not, at least make sure you have receipts and payment proof within the tax year the deduction is taken.

Mileage logs.

You will need to show properly maintained mileage logs for business miles, charitable miles, and any medical mile deductions.

Business records.

You will need financial statements for any business-related activity with supporting documentation.

Residency.

If you live in multiple states or multiple countries, you may have to prove where you lived during the year. Keep records that show your physical presence to support your tax filings.

Proof of non-reimbursement.

If you claim any unreimbursed business expenses, many states are asking you to prove that you were not able to get these expenses reimbursed from your employer. The easiest ways to do this are to show a denied expense report or to get your employer to write a letter that confirms your expenses were not reimbursed. Those most impacted by this are musicians, barbers/hairstylists, construction workers, and anyone who uses their own tools to do their job for their employer.

While you can never be completely sure you won’t face an audit in your lifetime, you now know which documents an auditor will want.