The IRS audited fewer people in 2014 than in previous years, but that doesn't mean your clients aren't at risk for being audited. Whether you work with individual taxpayers, small-business owners or corporations, you can do a few things to help your clients avoid tax audits in 2015 and beyond. These tactics require good communication skills and attention to detail, but they are worth it when building strong client relationships.
Before you prepare a tax return, ask your client to provide copies of every W-2 and 1099 form received during the previous year. When an individual submits a tax return, the IRS computer system matches the income reported with the amounts reported on all W-2s and 1099s for the same year. If the amounts do not match, the risk of a tax audit increases.
If any of your clients run cash-based businesses, reduce the risk of a tax audit by working together to set up a system for documenting cash income. IRS agents pay close attention to returns submitted by taxi drivers, bar owners and other people who tend to get paid in cash. By advising your clients to document each transaction, you can substantially reduce the risk of an audit.
Clients who donate to charitable organizations as a way of reducing their tax liability must be careful not to exaggerate their donation amounts. If a client tries to deduct a disproportionately large amount of money for charitable donations, the risk of a tax audit increases. Make sure your clients keep receipts for all the donations they make each year. Advise taxpayers to have valuable items appraised before donating them to museums, schools or other nonprofit organizations. Without an appraisal, the value of a donation is difficult to prove.
For divorced clients, alimony payments can complicate tax matters. Under certain circumstances, the person who pays the alimony can deduct the amount paid from his or her tax return. The limitations are very strict on this deduction, however. The alimony must be paid under a maintenance decree or divorce decree. Help your clients avoid a tax audit by reviewing their divorce or maintenance decrees before filing their returns.
If your accounting firm works with small-business owners or corporate clients, talk to your clients about the importance of keeping receipts for all business expenses. Large deductions for business-related meals and travel often send up a red flag to the IRS, triggering a tax audit. Not only should they keep their receipts, but they should also document the reason for the meeting and the names of everyone in attendance.
One of your primary responsibilities as an accountant is helping your clients avoid tax audits. Enhance the reputation of your accounting firm by teaching clients how to reduce their tax liability without running afoul of the law or triggering an audit by IRS.
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