Steer Clear of a Tax Audit for 2010

The Internal Revenue Service audits about one percent of US Taxpayers each year. As a real estate professional, you are likely to have an independent contractor relationship with your broker. Although your chances of being audited are pretty slim, there are basic principles that will reduce the likelihood of being part of that one percent.

A few items to avoid are significant deductions for automobile expenses, home improvements, or outrageous meal expenses. By following these 7 steps, you can lower your chances of being audited.

1.) Stay away from using Cash

Avoid using cash. Credit Card transactions make many of your expenses more respectable. Real estate is not a very cash intensive business, so that is one benefit.

2.) Avoid the barter system

Substituting services in lieu of payment for transactions is another big flag. The IRS compares your business income to your living expenses to figure out if you're living beyond your documented means.

3.) Deduct within reason

Writing off too many business-related expenses can put you in the IRS' radar, especially if the income you report is relatively modest. This has not been a great income year for many REALTORS®, but the IRS formulas do not think. If you invested a lot in marketing but did not get a strong return, don’t push the envelope on padding your expenses.

An IRS computer program compares your deductions to others in the same income bracket (the so-called DIF Score) and selects the returns with the highest probability of generating additional audit revenue. A decision to forgo a legitimate deduction may be based on the taxpayer's particular audit tolerance or if there are other areas of the return that the taxpayer does not wish to call attention to.

4.) Calculate your deductions correctly

Mistakes in calculating deductions won't automatically serve your return to the top of the IRS pile, but too many mistakes in your favor may trigger an audit. Since you receive a 1099 from your brokerage for work that you performed as an independent contractor, be sure to enter the exact amount on your tax return. Remember that your brokerage also sends a copy of the 1099 to the IRS, the slightest discrepancy between the two numbers will kick out your return to an investigator.

5.) Hold on to Receipts

It's important to keep good records in case the IRS does inquire about your tax return. Independent contractors and business owners are required to keep receipts for all expenditures of $75 or more for meals or entertainment, and to keep those receipts for at least three years. Good receipt-keeping is also important if you're planning to take large personal deductions. For example, if you're claiming a large medical or charitable deduction that you think might increase your odds of being audited, make sure to attach copies of your medical bills and charitable receipts to your return.

6.)    Keep excellent records

Using an official account program is the way to go, especially if you are a broker.   Technology solutions exist to help aid real estate professionals in their bookkeeping. Companies like Lone Wolf and SureClose provide business management solutions that make accounting more straight forward.

7.) Use a licensed accountant

If you already have an accountant or tax professional who prepares your business return, it's a good idea to let the same practitioner prepare your personal return as well. Not only will you avoid some of the common tax preparation mistakes, but you'll also have an advocate to support you if you do get that dreaded letter from the IRS. If your tax preparer did a competent, professional job of reporting your income and deductions, you should have nothing more to fear than the inconvenience of responding to the letter and possibly meeting with an IRS agent. Competent, licensed, professional tax accountants will warn you when taking a certain position can heighten the possibility of an audit and when a tax return looks out of line.

If you have any tax preparation questions or advice, please leave a comment below and we would be happy to discuss!

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