IRS Hot Audit Areas
This issue summarizes the dramatic increase in IRS audit activity.
INCREASED IRS AUDITS
Forget about the kinder gentler IRS. Auditing activity is already being dramatically increased. The IRS is asking for an extra $300 million for enforcement and it is likely to be granted. Primary targets will be upper-income tax filers, filers claiming the earned income credit, abusive tax shelters, and offshore credit card fraud. In addition, audits of business are being increased. Self-employed businesses are being looked at for unreported income, S Corporations are being examined for payroll tax abuses (not reporting enough salary for the owners), and S Corporations ans partnerships are having their K-1 information compared to what is being reported on partners' tax returns.
Routine business audits are also targeting business executives' compensation and benefits packages. Non-qualified deferred plans, stock-based compensation, deductions for salaries that exceed $1 million, and options put in family partnerships are areas that are attracting the most attention. The IRS is also going after abuses found in 412(i) plans that used artificially low cash surrender values. Deductions will be limited if the value of insurance and annuities held in those plans exceeds the benefits to which employees are entitled. Also, plans that favor key employees are under scrutiny.
The IRS is requiring that cell phones used for business need strict documentation in order to be deductible. Your records must include, the time, place and business purpose of the calls.
Corporations are also at increased audit risks due to the development of a new Schedule M-3, which will require a more detailed reconciliation between book and tax income.
One more disturbing item – the IRS wants a lot less "no-change" examinations.
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