The Federal government is $17 trillion in debt, and desperately needs money. And the orders have been issued to the Internal Revenue Service to step up its investigations of small businesses and individuals, including those who have rental properties. So don't be surprised if an IRS agent shows up at your door auditing your taxes this year.
The penalties for under-reporting taxes are stiff: if you are caught cheating by an auditor, he or she can either slap you with civil fines and penalties or, worse, refer your case to the IRS's criminal investigation division.
According to the IRS, individual taxpayers do 75% of the cheating -- mostly middle-income earners. Cash-intensive businesses and service industry workers, from handy people to doctors, are the worst offenders. If you are audited, expect an IRS agent to examine ALL of your personal and business bank statements, credit card statements, Paypal accounts, etc. And anticipate the auditor to request proper substantiation for all of those auto expenses and meals and entertainment deducted on your tax returns.
Unless you have flawfless records, expect to pay dearly. It is not uncommon to end up with a tax bill of thousands of dollars after an audit.
Your best defense is obtaining good tax counsel before your tax returns are prepared. Such will save you thousands of dollars and may keep you out of jail.
William Brighenti, CPA
