IRS News: Audits and Home Office Deductions

The IRS announced recently:

1. Audits were down overall for fiscal 2012 but some taxpayers faced increased scrutiny.
2. There will be a new, simpler option for deducting home office expenses, starting in 2013.

Here are details of these two tax announcements.

The IRS Is Conducting Fewer Individual Audits -- But Examining More Businesses The IRS just released data showing that overall audits were down in fiscal 2012 to 1.03 percent of all tax returns filed, as compared with 1.11 percent the previous year. However, audits of all types of businesses went up. Here are some highlights from the latest IRS enforcement results. ·    Audits of taxpayers in the upper income ranges remained substantially higher than other categories. For example, 0.94 percent of taxpayers with incomes of less than $200,000 were audited as compared with 12.14 percent of taxpayers with incomes of $1 million or more. ·    According to the recently released statistics, audits that are conducted by mail, called "correspondence audits," are significantly higher than "field audits," which are conducted in person. In 2012, there were 359,750 field or face-to-face audits as compared with 1,122,216 correspondence audits. ·    The IRS increased examinations across all categories of business returns in 2012 as compared with the previous year. Specifically, 0.48 percent of Subchapter S corporations were audited, as compared with 0.42 percent in fiscal 2011. Partnerships audits were conducted at a 0.47 percent rate, as compared with 0.40 percent the previous year. ·    Small corporation returns (with assets under $10 million) were audited at a 1.12 percent rate, as compared with 1.02 percent the previous year. Nearly 18 percent of large corporations (with assets of $10 million and higher) were audited. The very largest corporations with assets of $250 million or more had a 29.41 percent audit rate, as compared with 27.6 percent in fiscal 2011. ·    In terms of tax-exempt organizations, 1.34 percent were audited, compared with 1.36 percent the year before. ·    Levies, liens and seizures were down in fiscal 2012, as compared with the previous year. In criminal tax cases, the IRS had a 93 percent conviction rate on prosecutions it recommended. The average sentence for criminal tax and tax related cases was 32 months, compared with 25 months the previous year.

New Option for Writing Off Home Office Expenses The IRS announced a simplified option that many owners of home-based businesses and some home-based workers can use to figure their deductions for the business use of their homes. (IRS Revenue Procedure 2013-13) The new option is effective beginning January 1, 2013 so it will be available for tax returns filed in 2014. It is an alternative to the current calculation, allocation and substantiation requirements. However, because the new option has limits, a taxpayer may get a larger deduction by continuing to use the current rules. The optional deduction is capped at $1,500 per year based on $5 a square foot for up to 300 square feet. Current rules: A taxpayer is generally required to fill out the 43-line IRS Form 8829. It may contain complex calculations of allocated expenses, depreciation and carryovers of unused deductions. New rules: Taxpayers claiming the optional deduction will complete a different, simplified form. They cannot depreciate the portion of their homes used in a trade or business but they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions. The deductions do not need to be allocated between personal and business use, as is required under the current method. Important: The new option does not change the current restrictions on home office write-offs, such as requirements that a home office must be used "regularly and exclusively" for business and that the deduction is limited to the income derived from a particular business. A taxpayer can elect from taxable year to taxable year whether to use the new method or to calculate and substantiate actual home office expenses. An election for any taxable year, once made, is irrevocable. "A change from using the new method in one year to actual expenses in a succeeding taxable year, or vice-versa, is not a change in method of accounting" and does not require IRS consent, according to the new Revenue Procedure. The new option will "reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually," the IRS stated. In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for the business use of a home.