Bergerson Tax Services

As a self-employed person, you are three times more likely than an employee who receives a W-2 form to be audited by the Internal Revenue Service, according to 2005 data from the IRS. Combine that with the fact that the number of audits of small corporations has been on the rise in the last few years, and you have the potential for a real hassle. But don’t despair; there are several things you can do to reduce your chances of being audited and to protect yourself in the event that you are.

File OH time. Make sure you file both your income tax return and quarterly estimates before the deadlines. Nothing throws up a red flag and says “audit me” more than consistently filing your returns and quarterlies late. If you can’t file on time, be sure to file an extension. Remember, though, that extensions don’t eliminate interest charges.

Keep good records. One particularly vexing issue for salespeople who use their cars for business is substantiating business mileage with a properly documented mileage log. Few mileage logs are up to IRS standards. The IRS will accept either paper or computer-generated logs, but the IRS tends to view computer logs as less credible. (You can find my version of a paper mileage log, called The Audit Angel, for $19.99 at my Web site, www.bergersontax.com)

Double-check meal and entertainment deductions. Meal and entertainment costs are deductible up to 50 percent if they are ordinary (commonly done) and necessary to your business and are either directly related to the active conduct of your business or directly preceding or following a substantial business discussion on a subject associated with your business. Ordinary and necessary costs are those considered helpful and common practice in your industry. You can entertain business associates in nonbusiness settings such as restaurants, theaters, sporting events, and nightclubs, provided the entertainment directly precedes or follows a business discussion. Business associates would include clients, prospective clients, suppliers, employees, partners, or advisers. You should document where the meeting was held, with whom, and the purpose of the meeting. Keep this information with the receipt.

Classify your workers properly. A top audit trigger is a business-such as a real estate brokerage-that treat workers as independent contractors. Questions are more likely to arise about the employment status of office personnel or assistants working for salespeople. If the IRS rules that these workers are employees, you could owe employment taxes, penalties, and interest. While federal tax law provides a safe harbor that classifies real estate salespeople as independent contractors, unlicensed assistants do not have such protection. One important factor in determining independent contractor status is behavioral control, or to what degree workers control how, where, and when they work. If a worker receives extensive instructions on how work is to be done, it suggests employee status. If a worker receives benefits such as paid leave, health insurance, or a retirement package, this might also indicate employee status. For further details on the distinctions between independent contractors and employees, go to www.irs.gov/business and read Publication 1779.

Review IRS audit guides. Audit technique guides were developed by the IRS to assist its agents in performing examinations. These guides contain examination techniques, industryissues, business practices, industry terminology, and other information to assist examiners in performing audits for particular industries. These guides are available to the public at the IRS Web site so you can obtain them and learn in advance what issues the IRS will examine during an audit.

Get good advice. If you’re not aware of new twists in the country’s constantly changing tax laws, you might cost yourself money. If you have a question regarding possible deductions or how to report income, ask a tax professional or call the IRS directly. The money that you spend for good advice up front can pay you back many times over into the future. Follow these easy steps, and you’ll reduce your chances of an IRS audit. At the very least, you’ll have appropriate backup for your deductions to satisfy even the toughest auditor.

1. Huge Tax Savings!  For 2009 the I.R.S offers a 55 cent/mile deduction for miles driven for work purposes using the standard mileage rate.  Find more information on the standard mileage rate in The Audit Angel 2009, Your Essential Income Tax Organizer & Mileage Log or at www.bergersontax.com under the Tax Answers and Article section. Using a mileage-log allows you to claim the standard mileage rate and take advantage of this generous tax deduction.

2. The I.R.S. is Cracking Down.  The days of the kinder, gentler I.RS. are over. They have realized that some taxpayers have been exploiting deductions and are not able to validate their deductions in an audit situation.  The I.R.S has hired thousands of new agents to target self-employed individuals and people who use mileage for business purposes as a deduction. Unfortunately many of these audit victims are not prepared and do not have a complete mileage-log and record keeping system to validate their mileage and business related expenses.

3. Incredibly Easy to Use. Just keep your mileage-log in your vehicle and write down the key pieces of information required by the I.R.S for your business related mileage every time you drive.  At the end of every week or month total up the amount and carry it forward to the end of the year.  At the end of the year deduct the total amount of business miles driven and reap the huge tax deduction!

4. New IRS Rules. Unlike in the past, the I.R.S now allows you to claim the standard mileage rate on multiple vehicles. Just carry your mileage-log with you in whichever vehicle you use to document the proper information.  To simplify even more, use different color pens for certain vehicles.  Then it will be easy to total the mileage on each vehicle at tax time.

5. Tax-Time Relief. Rather than having to scramble for receipts or to find out how many miles to claim on your taxes you will have everything already documented.  You will never have to worry about if your tax return gets audited because you will easily be able to validate all the key pieces of information that the I.R.S requires.  Simply take the running total of all the business miles driven over the course of the year and claim that amount on your income tax return to receive the generous 55 cents/mile.

Under the new law, allowable deductions for charitable contribtutions of vehicles for which the claimed value is over $500 will depend on how the vehicle is used by the recipient charity. If the chairty sells the vehicle without any significant intervening use or material improvement, the donors deduction is limited to the gross sales proceeds received by the charity. If the charity uses the asset in direct furtherance of its charitable purpose the donor may deduct the “Fair Market Value” of the vehicle. Example: If a vehicle with a “Fair Market Value” of $3,000 is donated to a charity and they sell the vehicle for $1,500, the donor can only deduct $1,500. If the charity provides the vehicle to a disadvantaged person, the donor may deduct the “Fair Market Value” of $3,000.

The standard deduction for taxpayers who do not itemize a deduction(s) on Schedule A of Form 1040 is, in most cases, higher for 2008 than it was for 2007. The amount of the deduction depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer.
The basic standard deduction amounts for 2008 are:

• Head of household deduction is $8,000
• Married taxpayers filing jointly and qualifying widow(er)s deduction is $10,900
• Married taxpayers filing a seperate deduction is $5,450
• Single deduction is $5,450

The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of $900 or the sum of $300 and the individual’s earned income.

For 2008, the additional standard deduction amount for a person who is age 65 or older or blind is $1,050. If you are single and not a surviving spouse, the additional standard deduction amount is $1,350.

Exemption Amount Increased

The amount of the deduction for each exemption has increased from $3,400 in 2007 to a deduction of $3,500 in 2008.

To learn more about tax deduction information contact Bergerson Tax Services.

Beginning January 1, 2008, the IRS allowable deductions for the standard mileage rate are as follows:

• Business miles. The standard IRS mileage rate for the cost of operating your car increases to 50.5 cents a mile for all business miles driven between January 1, 2008 and June 30, 2008 and 58.5 cents a mile for all business miles driven between July 1, 2008 and December 31, 2008.
• Charitable services. The standard IRS mileage rate allowed for use of your car when you use your car to provide charitable services to a charitable organization remains at 14 cents a mile.
• Medical reasons. The standard IRS mileage rate allowed for use of your car for medical reasons is 19 cents a mile for miles driven between January 1, 2008 and June 30, 2008 and 27 cents a mile for miles driven between July 1, 2008 and December 31, 2008.
• Moving. The standard IRS mileage rate for determining moving expenses is 19 cents a mile for miles driven between January 1, 2008 and June 30, 2008 and 27 cents per mile for miles driven between July 1, 2008 and December 31, 2008.