How to Make Sure Your CPA is Getting the Correct Deductions for Your Business
As tax season approaches, collaborating effectively with your CPA can significantly impact your financial outcomes. Ensuring the accuracy of deductions is paramount. Here’s how to oversee and confirm your CPA’s tax deduction strategies:
1. Open Communication:
Establish a clear line of communication with your CPA. Express your financial goals and inquire about their approach to deductions. Discussing these aspects openly can offer insights into their strategy and help align their practices with your objectives.
2. Comprehensive Documentation:
Compile and organize all relevant financial documents, receipts, invoices, and statements. These materials serve as evidence for deductions claimed. Share these documents with your CPA, ensuring they have a comprehensive view of your financial landscape.
3. Understanding Tax Laws:
Stay informed about tax laws and regulations, especially changes that could impact deductions. Although CPAs are well-versed in tax laws, your understanding can help in asking pertinent questions and validating their strategies.
4. Reviewing Past Returns:
Examine previous tax returns to identify patterns or discrepancies. If you notice inconsistencies, discuss them with your CPA to ensure they are rectified in the current filing.
5. Asking Informed Questions:
Engage your CPA in discussions about the deductions they propose. Inquire about the rationale behind each deduction, ensuring they align with applicable tax laws and your financial circumstances.
6. Seek Clarification:
If you’re uncertain about a deduction, request clarification from your CPA. Understanding the purpose and eligibility criteria for deductions can bolster your confidence in their accuracy.
7. Scrutinizing Deductions:
Carefully scrutinize deductions proposed by your CPA. Verify that they accurately represent eligible expenses, and cross-reference them with your documentation to ensure consistency.
8. Utilize Technology:
Leverage accounting software or apps to track expenses and deductions throughout the year. This proactive approach can streamline the process and offer real-time insights to your CPA.
9. Collaborative Approach:
Consider collaborating with your CPA periodically throughout the year, rather than just during tax season. This ongoing partnership allows for continuous assessment and adjustment of deduction strategies.
10. Seek a Second Opinion:
In complex financial situations or if you harbor doubts, consider seeking a second opinion from another qualified tax professional. An additional perspective can provide reassurance or highlight potential oversights.
Absolutely! Including a FAQ section can address common queries and offer additional clarity to your readers. Here’s an example of what a FAQ section could look like:
FAQs
1. What types of deductions should I be most vigilant about when reviewing my tax filings?
Look closely at deductions related to business expenses, charitable contributions, medical expenses, and any claimed deductions for education or home-related expenses. These are common areas where errors or oversights might occur.
2. How often should I communicate with my CPA regarding deductions?
Aim for regular communication throughout the year, especially during significant financial events like buying or selling property, starting a business, or major life changes. Additionally, quarterly or semi-annual check-ins can help ensure all deductions are accurately captured.
3. Can I challenge my CPA’s deductions if I disagree with them?
Yes, you can and should ask for clarification if you have concerns about deductions. Your CPA should be able to explain the rationale behind each deduction, but if you still have doubts, seek a second opinion from another qualified tax professional.
4. Should I keep records of all my expenses even if I’m not sure they’re deductible?
Absolutely. Maintaining comprehensive records ensures that if there’s any uncertainty or if tax laws change, you have the necessary documentation to support your deductions. Consult with your CPA to determine which expenses are deductible.
5. How can I stay updated about changes in tax laws that might affect my deductions?
Stay informed by following reliable financial news sources, subscribing to newsletters from financial institutions or tax authorities, and discussing these changes during your regular communications with your CPA.
6. Is it advisable to use tax preparation software along with a CPA?
Yes, using tax preparation software to track expenses and deductions can complement your CPA’s expertise. It can help you maintain accurate records and provide real-time insights, which you can then discuss with your CPA for optimal tax planning.
7. Should my CPA talk to my wealth manager?
Collaboration between your CPA and wealth manager can be advantageous. While not explicitly required, aligning financial strategies can provide comprehensive insights and optimize tax and investment planning.
8. What documents, including K-1 and others, should I submit to my CPA?
Alongside maintaining comprehensive records and documentation, submit all relevant forms including K-1, 1099s, W-2s, and other income-related documents for accurate tax filings. Your CPA can advise on additional needed paperwork based on your financial circumstances.
9. Contractor vs. employee write-offs – what can I write off?
Write-offs vary for contractors and employees. Contractors often claim a broader range of deductions related to business expenses, while employees have limited options. Your CPA can guide you on eligible deductions based on your employment status and tax laws.
Common Triggers for IRS Scrutiny in Business Tax Returns
Higher Than Average Income
A significantly above-average annual income can attract IRS scrutiny. Those with incomes between $200,000 and $1 million filing a Schedule C in 2018 faced a 1.4% audit rate compared to the overall 0.5%.
Disproportionately Large Deductions
Claiming unusually high deductions compared to your income might raise red flags. While valid in certain scenarios like starting a new business or significant charitable donations, unrealistically high deductions could draw IRS attention.
Filing a Schedule C
Filing a Schedule C, especially for sole proprietorships, could increase the likelihood of an audit as the IRS often reviews these filings more closely.
Consistently Claiming Business Losses
Reporting continuous business losses might lead the IRS to question whether these losses are legitimate or if they’re masking personal expenses, potentially raising audit concerns.
Filing Late
Late filings can invite IRS scrutiny. Filing early can help avoid complications and unwanted attention.
Deducting Business Expenses, Travel, and Entertainment
Excessively high deductions for business expenses, especially after the 2017 tax reform eliminating entertainment deductions, might attract IRS attention. Detailed records are essential, particularly for home office deductions due to the rise in remote work.
Rounding Up or Averaging Income
Accurate reporting is crucial; rounding up or averaging income might suggest inaccuracies in your return.
Claiming Your Vehicle as 100% Business Use
Claiming 100% business use for a vehicle requires meticulous record-keeping. There are two methods for claiming vehicle expenses – actual expenses or the simplified mileage method – and mixing these methods can raise IRS concerns.
To learn more about red flags that may trigger an IRS audit, check out our guide, here.
Final Notes
Collaborating effectively with your CPA and actively participating in the deduction process is pivotal. By maintaining open communication, understanding tax laws, and reviewing deductions diligently, you can ensure the accuracy of your tax filings and maximize your deductions.
In conclusion, while CPAs are experts in navigating the complex landscape of tax deductions, your active participation and oversight play a crucial role in verifying the correctness of their strategies. By implementing these steps, you can fortify your confidence in your CPA’s deductions and optimize your tax outcomes.
Remember, regular communication, thorough documentation, and informed discussions form the pillars of a successful collaboration with your CPA, ensuring that your financial health remains robust.
Learn More About Milikowsky Tax Law
CPAs make up the lion’s share of our referral partnerships. Because we do not do our clients’ taxes, we are a great partner for CPA firms whose clients are facing complex tax audit situations.
Learn more about us, here. Read on for insights for CPAs to minimize audit risk for their clients.
