Tax Audit 101: Your No-panic Guide to Dealing with the IRS

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Getting notified of an IRS audit is undoubtably a stressful experience for taxpayers. Why was your return selected? What documents will they request? How can you prepare for the scrutiny of your financial records?

By understanding the ins and outs of audits, you can ease your mind and ensure the process is as painless as possible.

How are taxpayers selected for an audit?

The IRS uses a variety of methods to select tax returns for audits, including:

  • Random selection. The IRS randomly selects a small percentage of tax returns each year to audit, just to ensure overall compliance.
  • Computer screening. The IRS uses computer programs to score tax returns based on a variety of factors. Returns with high scores are more likely to be audited.
  • Related examinations. If the IRS is auditing a business or individual, they may also audit related returns, such as those of the business owner or the business itself.

What won’t trigger an audit?

While there’s no way to guarantee you won’t be audited, there are some factors that usually won’t prompt the IRS to take a closer look:

  • Math errors (the IRS will usually just correct these)
  • Claiming the standard deduction
  • Having low to moderate income
  • Filing an amended return

How are you notified of an audit?

The IRS will never notify you by telephone. If selected for an audit, you’ll be notified by the IRS via postal mail, outlining the type of audit you’ll be undergoing: a mail audit or an in-person audit. A mail audit can be conducted through postal correspondence, while an in-person audit takes place in an IRS office or at your home or place of business.

How should you respond to an audit?

The audit notice will provide contact information and instructions, including a list of records they to review and a response deadline. If you receive an audit notice from the IRS, be sure to:

  • Collect all relevant tax documents, receipts and other records you’ll need to substantiate the items on your return
  • Consider hiring a tax professional to help you navigate the audit process and represent you before the IRS
  • Respond in a timely manner, meeting all deadlines set by the IRS to avoid additional penalties and interest

How long does an audit take?

Once you’ve provided the requested information, the IRS will review it and make a determination.

But the length of an audit varies depending on various factors, including the type of audit and whether both parties agree with the findings. If you disagree with the IRS, you have the right to file an appeal. The IRS also offers mediation services to help you come to a resolution.

What happens after an audit?

Once the IRS concludes an audit, a few things can happen:

  • If no changes are made to your return, the audit is closed
  • If the IRS made changes, you’ll receive a notice detailing the adjustments and any additional taxes owed
  • You may be subject to future audits, especially if issues were identified in the current audit

Ready to assist

If you or your business receive an audit notification, the CPAs at Magone & Company can offer our honest and objective audit services. Reach out today at (973) 301-2300.

Found Money: Common Tax Deductions You May Have Missed

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Every year, taxpayers inadvertently leave money on the table by overlooking deductions that are rightfully theirs for the taking. The tax code actually offers many legitimate deductions that are IRS-approved and yours for the taking — as long as you claim them. So when tax season rolls around, be sure you’re getting every penny you deserve.

Mortgage interest

If you own a home and have a mortgage, you can deduct the interest you pay on that loan. When you’re in the early years of your mortgage, your savings can be substantial as the majority of your payments go toward interest. And depending on where you live, you may be able to deduct state and local taxes, including property taxes, which can further reduce your tax liability.

Mortgage points

When you take out a mortgage, you may pay “points” — an upfront fee that lowers your interest rate. These points are usually tax-deductible in the year they are paid, even if you don’t itemize.

Home sale costs

Selling your home? The costs associated with the sale, such as real estate commissions, title insurance and legal fees, can be used to offset the capital gains tax on the sale. This helps reduce your overall tax burden.

Home office deduction

If you use a portion of your home regularly and exclusively for business purposes, you may be able to deduct your direct and direct expenses of running a business from your home office, including rent, utilities, insurance and other home-related expenses. Does your home fit the bill? Find out.

Continuing education and professional development costs

Are you or your dependents pursuing higher education? This deduction covers qualified education expenses for eligible students, allowing you to deduct up to $4,000 of qualified expenses, such as tuition and fees. Parents may also deduct interest payments on certain student loans from qualified lending institutions.

Ongoing training and education related to your current job may also be tax-deductible, even if your employer doesn’t reimburse you. As long as the training maintains or improves your job skills, it can qualify.

Medical and dental deductions

Medical and dental expenses that aren’t reimbursed by your insurance may be deducted to the extent your annual total exceeds 7.5% of your adjusted gross income. But to qualify for medical deductions, you must also itemize. When adding up your medical costs, be sure to include the cost of traveling to your doctor or medical facility for treatment, including your out-of-pocket expenses for gas, oil, repairs, parking and tolls.

Long-term care insurance is also a deductible medical expense. As long as your employer or spouse’s employer doesn’t subsidize the insurance, you may deduct an increasing portion of your premium as you age.

Legal and professional fees

Did you know that fees paid to lawyers, accountants, financial advisors and other professionals can sometimes be deducted? This can include the cost of tax preparation, estate planning and even consulting for starting a new business.

Don’t leave money on the table

The professionals at Magone & Company can help you navigate the deductions and tax credits your entitled to claim. Call us today at (973) 301-2300.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.

Keeping Main Street Strong: Protecting Small Business Tax Relief

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Small businesses face a critical tax challenge as a significant tax deduction is set to expire at the end of 2025. But the Main Street Tax Certainty Act aims to provide a lasting solution.

Initially introduced in the 2017 Tax Cuts and Jobs Act, the Main Street Tax Certainty Act is proposed legislation to make the 20% pass-through business income tax deduction permanent. This benefit allows eligible small businesses — including sole proprietorships, partnerships and S corporations — to reduce their taxable income, provide tax stability and support continued economic growth.

What this means for Main Street USA

Small businesses, which create local and drive economic growth, are experiencing significant pressures — from economic uncertainty to rising prices to a labor shortage.

By offering a commonsense solution to strengthen these businesses, the Act seeks to enhance their resilience and arm them with a competitive edge, ultimately supporting the long-term success of small towns across the U.S.

The deduction supports 2.6 million jobs and contributes $325 billion to the U.S. economy. Permanent tax relief would enable:

  • Improved financial planning
  • Increased investment in workforce and technology
  • Enhanced competitiveness against larger corporations

The bill requires broader bipartisan support in order to be signed into law. Small business owners are encouraged to stay informed about the legislation, lobby their local Congressional representatives and consult tax professionals about impending impacts.

Navigating tax changes with confidence

If you have questions about how this potential change could affect your tax strategy, the tax experts at Magone & Company can help guide your business with a sound financial plan. Reach out today at (973) 301-2300.

Best Accounting Practices for an Online Business

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Running an online business comes with its own set of unique challenges. One of the biggest hurdles? Managing the financial side of the company.

From cash flow fluctuations to multi-state sales tax laws, online businessowners must have the accounting strategies in place to navigate daily operations with confidence.

Here are six best practices to ensure your online business is positioned for sustainable success:

  1. Monitor your bank accounts and cash flow. Like any business, first and foremost you need to keep a close eye on your bank account, making sure you’re not overspending or simply spending money you don’t have. This proactive measure allows you to quickly identify any discrepancies or errors, and pinpoint areas of your business that may need additional attention, so you can plan for potential changes to your finances. Online businesses should have a system in place for tracking all income and expenses. This includes recording every sale, subscription payment, advertising cost, software subscription and more. Categorizing transactions properly is key, as it will make tax preparation and financial analysis much easier down the line.
  2. Leverage accounting software. Investing in a robust accounting software solution is essential for online businesses. Popular desktop options like QuickBooks, Xero and FreshBooks can automate many time-consuming tasks like invoicing, expense tracking and financial reporting. This time saver also helps maintain accurate documentation when it’s time to prepare your tax returns.
  3. Utilize cloud-based tools. You may also consider cloud-based accounting software to access your financial data from anywhere, collaborate with your tax professional and take advantage of features like automated backups and real-time reporting. The rise of cloud-based accounting, invoicing and productivity tools has been a game-changer for online businesses, allowing for real-time financial visibility, remote collaboration and automatic data backups — all crucial for managing an online operation. 
  4. Manage sales tax compliance. Online businesses must navigate different tax rates across states, counties and cities, as well as varying product categorizations and exemptions. Depending on the states and countries in which your online business operates, you may be required to collect and remit sales tax. Proper sales tax management is not just about collecting the right amount — it’s about maintaining your business’s reputation, avoiding costly penalties and achieving sustainable growth. Regular review and updates of your sales tax compliance processes can keep your business current with changing regulations while maintaining proficient operations.
  5. Prepare for quarterly tax payments. Unlike traditional businesses that make annual tax payments, online entrepreneurs often need to make quarterly estimated tax payments to the IRS. This includes self-employment tax, as well as income tax. Making timely quarterly payments helps you stay on top of your tax liability and avoid penalties, and demonstrates to authorities that you’re a responsible, compliant business owner.
  6. Document everything. When transactions happen at the click of a button, meticulous record-keeping is a critical task. Online business owners should keep detailed records of all financial transactions, bank statements, receipts, invoices and other documentation. This will not only help with tax preparation and help reduce the likelihood of financial errors, but it also provides an ironclad paper trail if your business must undergo audit or other financial review.

With the right systems and mindset in place, there’s no limit to what your online business can accomplish. At Magone & Company, we can work together to ensure the financial side of your operations runs efficiently, while maintaining good standing with the IRS. Reach out to us today at (973) 301-2300.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.

 

Magone & Company, P.C. Successfully Passes Accountant Peer Review

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Magone & Company, P.C. — a leading provider of accounting services — is pleased to announce that it has successfully passed its latest accountant peer review. This achievement underscores the company’s commitment to maintaining the highest standards of professionalism and excellence in accounting practices.

The peer review, conducted by Martini & Martini CPA, PA, involved a rigorous assessment of Magone & Company’s accounting and auditing practices. The review confirmed that the firm complies with the stringent quality control standards set by the accounting profession.

“We are pleased to validate our dedication to delivering exceptional service and upholding the trust of our clients,” says Nick Magone, Managing Partner at Magone & Company. “This achievement reflects the hard work and expertise of our team, as well as our ongoing commitment to continuous improvement.”

By completing this review, Magone & Company demonstrates its readiness to provide reliable and trustworthy financial services to its clients.

For more information about Magone & Company, reach out today to discuss our tax planning solutions.

Small Businesses Get Big Benefits from SECURE 2.0 Retirement Provisions

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The federal SECURE 2.0 legislation was designed and enacted to improve retirement readiness for more American workers.

This legislation aims to make it more affordable and attractive for small employers to provide valuable retirement benefits to their employees by offering enhanced tax credits that can significantly offset the costs of starting and maintaining a plan.

Under SECURE 2.0, your small business may be eligible for the following:

Start-up tax credit. Small businesses with under 100 employees can claim a tax credit of up to $5,000 per year for three years to help cover the administrative costs of starting a new plan.

Previously, small businesses with less than 100 employees were eligible for a three-year, start-up tax credit of up to 50% of administrative costs with an annual limit of $5,000. SECURE 2.0 increased the credit to 100% of qualified start-up costs for eligible employers with no more than 50 employees, and at least one non-highly compensated employee, when they establish a SEP, SIMPLE, defined benefit or defined contribution plan, including 401(k) plans.

For employers with 50-100 employees, the credit is 50% of eligible start-up costs, up to the greater of $500 or the lesser of $250 per non-highly compensated eligible employee or $5,000. The credit is available for up to three years for all qualified employers.

Small employer auto enrollment credit. Businesses that automatically enroll employees in their retirement plan can claim a $500 per year tax credit for five years.

SECURE 2.0 introduced this new tax credit for eligible employers with under 100 employees who offer defined contribution plans like 401(k)s. The credit is based on an employer’s plan contributions, up to $1,000 per employee annually, excluding those earning over $100,000.

To qualify for the full credit, employers must have no more than 50 employees. For employers with 51-100 employees, the credit decreases by 2% for each additional employee over 50. The credit may cover up to:

  • Years one and two: 100% of contributions
  • Year three: 75% of contributions
  • Year four: 50% of contributions
  • Year five: 25% of contributions

Employers can claim this credit over five years.

Saver’s match credit. Lower-income employees who contribute to a retirement plan can receive a government matching contribution of up to $2,000, which the employer can claim as a tax credit.

Still on the fence about offering a retirement plan?

The new credits may provide the financial incentive you need to boost retirement readiness for your employees — especially with the rise of state retirement plan mandates. These state-level initiatives require businesses to either offer a qualified retirement plan or enroll employees in a state-run program. And as deadlines for compliance are approaching in several states, you may consider the benefits of a plan that demonstrates your commitment to your employees’ long-term financial security.

Questions? Reach out to the experts at Magone & Co for guidance on taking advantage of these and additional tax credits.


This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.