Tax Tip: Proof of Gross Income

During the course of a tax audit, the agent will add up all bank deposits, back out identifiable non-tax items (such as account transfers) and compare that total to the gross income reported on the tax return. The excess of deposits over reported income is deemed to be unreported taxable income unless proven otherwise. Frequently, taxpayers find themselves trying to explain undocumented deposits. A loan from a friend, a gift from a relative, and other clearly nontaxable deposits will be included in the taxpayer’s income unless proof of Continue reading »

Transfer Pricing – General Principles, Penalties and Contemporaneous Documentation

General Principles – Transfer pricing is relevant for U.S. companies with foreign subsidiaries or foreign parent companies that engage in certain intercompany transactions.  U.S. transfer pricing rules require that intercompany pricing between a U.S. company and a foreign affiliate must be based on an ‘arm’s length’ price that would be charged in a similar transaction with an unrelated third party.  The arm’s length principle is typically applied to intercompany transactions in which goods, services or property are sold between a U.S. company and a foreign affiliate.  The transfer pricing rules also can apply to Continue reading »

What are your chances of being selected for an IRS tax audit?

The 2011 IRS Data Book, a compilation of statistical data and IRS activities, is out.  You can read the whole book here: http://www.irs.gov/pub/irs-soi/11databk.pdf or just skip to page 22 of the publication for the important stuff.

In summary, the average audit rate for individual tax returns is 1.1%.  But what’s in your return can push you above the average.  At the high end, those making more than $1 million have an audit instance of 12.5%.  At the other end, returns for those making under $200,000 and without any business or rental activities have Continue reading »