Even though the overall IRS audit rate is currently low, it’s expected to increase as a result of provisions in the Inflation Reduction Act signed into law in August. So, it’s more important than ever for taxpayers to follow the rules to minimize their chances of being subjected to an audit. How can you reduce your audit chances? Watch for these 10 red flags that can trigger IRS scrutiny:

1. Large charitable donations. The IRS can reference data providing average charitable deductions based on various income levels. If you’re above average for your category, you might call attention to yourself. This is especially true if you’ve deducted charitable gifts of appreciated property. So make sure your donations are all properly substantiated, including by independent appraisals if required.
2. Gambling losses. Generally, you can deduct losses up to the amount of your winnings on your personal return, but you must have proof to back up your claims. If your gambling activities rise to the level of a professional gambler, you might be able to deduct a loss from other income, but the IRS often contests this tax treatment. Make certain that you recognize the risks.   
3. Unreported income. It’s easy to miss income that might fall through the cracks, such as interest and dividends as well as nonemployee compensation from Form 1099-NEC. If you fail to report the income, the IRS may uncover a discrepancy with the forms it receives. Be sure to provide your tax professional with all forms you receive.
4. Rental income and deductions. You don’t want the IRS to find that you played fast and loose with the rules for rental properties. Showing a loss for the year could trigger an inquiry. Generally, you may use up to $25,000 of loss to offset income from nonpassive activities, but you must meet specific participation requirements. Check with us to see if you’re on firm ground.
5. Home office deductions. If you use a portion of your home regularly and exclusively for your business, you may be able to deduct the expenses and depreciation associated with the space. Usually, the greater the business percentage claimed for use of the home, the greater the audit risk. Employees who work from home (as opposed to self-employed people) currently can’t claim a home office deduction. Now that more people are working from home, the IRS may look for taxpayers trying to bend the rules.
6. Casualty losses. Despite recent legislative changes restricting casualty loss deductions, you can still write off losses to personal property sustained in a federally designated disaster area. But be aware that the IRS may scrutinize appraisals to determine if you’re inflating a disaster-area loss.
7. Business vehicle expenses. The IRS often flags returns with large deductions for business vehicles, especially if they reflect double-digit depreciation allowances. Briefly stated, you’re required to keep a contemporaneous log of your driving activities, along with proper substantiation. Collect all the proof needed to withstand an IRS challenge during the year as opposed to trying to recreate these records after notification of an audit.
8. Cryptocurrency transactions. This is a relatively new potential audit target. The IRS now specifically asks on your return if you’ve bought or sold cryptocurrency. If you’ve answered yes, be prepared to substantiate the transaction information. The IRS may also question cryptocurrency losses to ensure that you have actually sold the holdings rather than simply experienced a reduction in value.
9. Day trading activities. Most taxpayers offset capital gains and losses from securities sales on Schedule D of their personal tax returns. But claiming to be a “day trader” may help you benefit from favorable tax provisions, including deductions for specific expenses. If you do this, consult with us to ensure you’re ready to respond to any IRS inquiries.
10. Foreign bank accounts. Checking the box on Schedule B that indicates you have a foreign bank account could increase your chances of an audit. But failing to check the box when you should do so may also trigger an audit. The IRS matches up the information it receives on foreign bank accounts. Generally, a taxpayer must file a Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate value of assets in foreign bank accounts exceeded $10,000 during the prior year.

Of course, this isn’t the end of the list. There are many other potential audit triggers, depending on a taxpayer’s particular situation. Also, keep in mind that some audits are done on a random basis. So even if you have no common triggers on your return, you still could be subject to an audit (though the chances are lower).

With proper tax reporting and professional help, you can reduce the likelihood of triggering an audit. And if you still end up being subject to one, proper documentation can help you withstand it with little or no negative consequences. Cray Kaiser is here to help guide you with best practices in documenting your tax records. If you receive an audit notice, don’t panic; call us at (630) 953-4900 as we have significant experience dealing with tax audits.

Companies that wish to reduce their tax bills or increase their refunds shouldn’t overlook the fuel tax credit. It’s available for federal tax paid on fuel used for nontaxable purposes.

When Does the Federal Fuel Tax Apply?

The federal fuel tax, which is used to fund highway and road maintenance programs, is collected from buyers of gasoline, undyed diesel fuel and undyed kerosene. (Dyed fuels, limited to off-road use, are exempt from the tax.)

But purchasers of taxable fuel may use it for nontaxable purposes. For example, construction businesses often use gasoline, undyed diesel fuel or undyed kerosene to run off-road vehicles and construction equipment, such as front loaders, bulldozers, cranes, power saws, air compressors, generators, and heaters.

As of this writing, a federal fuel tax holiday has been proposed. But even if it’s signed into law (check with your Cray Kaiser tax advisor for the latest information), businesses can benefit from the fuel tax credit for months the holiday isn’t in effect.

How Much Can You Save?

Currently, the federal tax on gasoline is $0.184 per gallon and the federal tax on diesel fuel and kerosene is $0.244 per gallon. Therefore, calculating the fuel tax credit is simply a matter of multiplying the number of gallons used for nontaxable purposes during the year by the applicable rate.

For instance, a company that uses 7,500 gallons of gasoline and 15,000 gallons of undyed diesel fuel to operate off-road vehicles and equipment is entitled to a $5,040 credit (7,500 x $0.184) + (15,000 x $0.244).

This may not seem like a large number, but it can add up over the years. And remember, a tax credit reduces your tax liability dollar for dollar. That’s much more valuable than a deduction, which reduces only your taxable income.

Keep in mind, though, that fuel tax credits are includable in your company’s taxable income. That’s because the full amount of the fuel purchases was previously deducted as business expenses, and you can’t claim a deduction and a credit on the same expense.

How Do You Claim It?

You can claim the credit by filing Form 4136, “Credit for Federal Tax Paid on Fuels,” with your tax return. If you don’t want to wait until the end of the year to recoup fuel taxes, you can file Form 8849, “Claim for Refund of Excise Taxes,” to obtain periodic refunds.

Alternatively, if your business files Form 720, “Quarterly Federal Excise Tax Return,” you can claim fuel tax credits against your excise tax liability.

Why Pay If You Don’t Have To?

No one likes to pay taxes they don’t owe, but if you forgo fuel tax credits that’s exactly what you’re doing. Given the minimal burden involved in claiming these credits — it’s just a matter of tracking your nontaxable fuel uses and filing a form — there’s really no reason not to do so.

If you have questions about how you might benefit from the fuel tax credit, please call the experts at Cray Kaiser today at 630-953-4900.

At Cray Kaiser, we believe the relationships we build with our clients make us more than just an accounting firm. Client satisfaction is our number one goal, which is why we solicit feedback each year via an online survey. Through the use of the Net Promoter Score (NPS) method, we are able to determine if “the CK way” is providing our clients with long-term value while developing their loyalty.

We are proud of our most recent NPS score of 94 which indicates our clients are highly satisfied with our services and are likely to recommend Cray Kaiser to their friends and colleagues. We continue to be appreciative of our clients that remain committed to the CK team.

Here’s what our clients are saying:

• 97% of our clients agree we are courteous and accessible.
• 88% of our clients feel we meet deadlines.
• 88% of our clients believe we provide high quality materials and information.

We are thankful to all our clients who participated in the 2020 survey. We promise to do our best to continue to meet and exceed your needs. If you have any questions, please contact us today.

My name is Kayla Daniels and I am a senior assurance accountant. I have been with CK for almost four
months. We’ve maintained really great communication with people who work from home. I also work
from home part-time, so I’ve experienced that firsthand where it’s really easy, we have the resources in
place to just jump on a video call. People are always available via their phone or cell phone. Honestly
working from home doesn’t feel that much different in terms of, just the lines of communication that we
have and they’re so open and available.

My name is Kayla Daniels and I am a senior assurance accountant. I have been with CK for almost four
months. Cray Kaiser is different from other places that I’ve worked mostly due to the flexibility that they
offer. I currently work on a flex schedule, which is only I work 30 hours a week, and it is what it sounds
like, it’s flexible. I can work from home, I can work from the office and we just kind of facilitate that
between ourselves every week. So I’ve really appreciated that flexibility that they’ve offered me.

Dan: So here at Cray Kaiser, we have five core values, and the one that continually jumps out at
me is care. Care is we believe the work we do matters because of the people and the
businesses that it impacts. Lots of times accountants, we just deal with numbers, we’re
just numbers people, right, but these are people’s businesses. This is their livelihood. So it
means the world to me to make sure it’s done right, to make sure that they have good
solid numbers in order to make good, smart business decisions with. So care is huge to
me. You’ve got to have a high care factor in order to connect.

Micah: The main word that I would use to describe the Cray Kaiser’s culture is collaborative, both
in a work sense and on a personal sense. So clearly in a work sense, we’re working
together to find solutions for clients to get through these tasks, to make sure that we’re
getting the work done. On a personal level, it’s almost more of a family atmosphere. We
have a lot of involvement in each other’s lives, everybody asks, how are you doing? How
was your weekend? How’s so-and-so or your wife, how’s, so-and-so, your dog? Very
involved with each other. I would say that we care a lot about each other as people which
really speaks to one of our core values at Cray Kaiser.

Natalie: What I enjoy the most about being on the Cray Kaiser team is that I feel that my opinion
and my knowledge is always valued. I may not know everything, but I can certainly look
and have others help me to find answers. I think we just truly embody what a team
means. Again, everybody’s important. Somebody’s perspective might be completely
different from you, regardless of how many years of experience they have, but they may
be able to bring something to the table that you haven’t thought of or explain something
in another way that you may not have thought of before. I feel like we’re always open to
listening to other people’s ideas so that we can make sure that we come up with the best
answers for our clients.