Now that tax time is in full swing, a question on a lot of people’s mind is, “Am I at high risk for an IRS audit?” Let’s face it, we all want to do as much as we can to save on taxes — but there are always little voices inside our heads that wonder:
Should I write this off?
Will it cause an audit?
Am I being too conservative and paying unnecessary taxes?
Here is a piece of information that most CPAs do not tell their clients: The US court system’s motto of “innocent until proven guilty” does not apply when it comes to tax law. It is imperative to understand that the IRS and the Tax Law do not adopt that same theory. Rather, it can be concluded that under the IRS, a taxpayer is actually “guilty until proven innocent.”
This means that tax payers need to prove their position in order to win the battle with the IRS. What is stated in the tax law is that the “burden of proof lies with the taxpayer.” This means that if the IRS questions one of your transactions, you need to prove your position in order to prevail. If you cannot support your position, then the IRS will automatically prevail because, again, the burden of proof is on us as taxpayers. As ludicrous as it sounds, the IRS does not need to prove that they are wrong!
To be clear, I am not trying to scare you away from taking the tax deductions that are legally available to you. I do want to make sure that you are well equipped to defend yourself in the unlikely event of an audit.
So what are some things that we should be doing to protect ourselves? Let’s take a look:
The 20 Best Books for Aspiring Real Estate Investors!
Here at BiggerPockets, we believe that self-education is one of the most critical parts of long-term success, in business and in life, of course. This list, compiled by the real estate experts at BiggerPockets, contains 20 of the best books to help you jumpstart your real estate career.
Although the IRS is gearing up its audit efforts, this does not mean that we should abandon all tax savings strategies. Rather, we should still plan for ways to legally reduce our tax liability. The only difference now is that we should be proactive in our planning. So take the responsibility to contact your tax advisor and work with them throughout the year to both maximize your tax savings and reduce your audit risk.
If you were to get audited by the IRS, make sure you send your tax advisor to meet with the IRS. Don’t represent yourself. There are two reasons for this:
- You are too close to the situation. Remove yourself from direct contact with the IRS agent to ensure you don’t say something you will regret because IRS agents can make your life extremely hard!
- You want to have your tax advisor represent you in front of the IRS agent to push back time. When your CPA meets with the IRS, he or she can defer answering questions on the spot by indicating that he will need to confer with you, the client.
Start on Solid Ground
Lastly, make sure you are working with tax advisors who have a good integrity to begin with. Ensure you are working with someone who is qualified and strategic in helping you to implement your tax saving strategies. The IRS has started to focus on CPAs who file tax returns with unsubstantiated deductions. This has been a great income lead for the IRS. Once they find such a CPA, they may actually audit each and every one of that CPA’s clients, and chances are, the IRS will prevail over all those other taxpayers as well. To ensure that you are protected, make sure you are working with tax advisors who are strategic rather than aggressive.
How do you safeguard yourself against audits?
Leave a comment below, and let’s talk!