Millions and millions of tax returns are filed with the IRS each year, and an unknown percentage are red flagged and chosen to be audited.  In most cases, returns are NOT merely selected at random.  The formula that the IRS uses to flag returns for audit, known as the Discriminant Function, is a highly classified top secret formula, as secret and guarded as the formula for Coke.   However, there are several types of returns that the IRS likes to feast on.  Taxpayers with returns that fall into these categories must accept that there is a higher probability that they will be audited.  Watch out if you are one of these type filers:

Returns with Itemize Deductions

Taxpayers who include a Schedule A with their 1040 likely have a higher chance of being audited than those who don't. This is because the additional calculations invite a greater possibility of fraud or error by the taxpayer.

Self-Employed and Rental Property Taxpayers

Taxpayers who report income on Schedule C or E are prime targets of the IRS, because of the number of expenses that can be claimed as deductions. Those who report net losses for the year that reduce other taxable income, such as salaries or investment income are especially vulnerable to examination by the IRS.

"Cash" Businesses

Many businesses have traditionally operated largely on a cash basis, such as laundry services, restaurants, casinos and gaming establishments and other similar enterprises.  A substantial percentage of these businesses have traditionally underreported their income on their tax returns, due to the difficulty of proving revenue that is received in cash from thousands of separate transactions.  Of course, this has not escaped the notice of the IRS, which has collaborated effort to exploit this area.  For every dollar adjustment by the IRS they receive 43.3% not including interest and penalties which put if above 50%.  Then they feed their findings to the State and you get wacked again with another 9.3% plus penalties and interest.  These costs all together can be greater than 75% of every dollar of adjustment.

Small Businesses

Even businesses such as florists, hobby store owners, construction contractors and other local enterprises are often scrutinized by the IRS. This is because even honest business owners and partners often don't understand the rules for correctly reporting their income and expenses and therefore submit erroneous returns. This is especially true of self-prepared Turbo Tax returns.

Large Transactions

Taxpayers who engage in the sale of substantial pieces of real estate or hold interests in oil and gas leases or other such investment property can often realize enormous income and profits from individual buyers or small companies. The IRS knows how easy it can be to underreport the profits from these transactions and they are after it.

Bottom Line

Remember, if the IRS flags your return for audit, it means it’s going to cost you.  They are going to find something.  They have unlimited time and resources to dedicated to their mission.  It is going to cost you no matter what you think.  Your time, your stress, your reputation and your dollars are at stake. When they find issues in one year then they expand their scope into another 2 years making your audit grow by 3 times.  Of course, this process could work the other way; it is possible that the IRS could state that you owe less than you reported.  Really, you think they spend very much time on this?  Really?  In 25 years of professional experience, I’m still waiting for that call… just once… for one client.  The key is to make sure that you have all of the documentation that you need to prove your deductions, such as copies of receipts and bills. As long as you can supply documentation of what the IRS requests, your audit should be a relatively quick but never painless.

Islip + Company CPAs offer personalized service to help you with these issues.

Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.

With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing. 

"It's not just about the numbers... it's what's behind the numbers that counts".

Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Sacramento – The Franchise Tax Board (FTB) and the California Tax Education Council (CTEC) reminded California taxpayers who use a tax professional to make sure they select them carefully.

CTEC, a non-profit corporation established by the California legislature, and FTB have partnered to educate taxpayers about tax preparers’ legal responsibilities, and to make sure those preparers are complying with the law. While more than 44,000 registered tax preparers are ready to assist California taxpayers, some operate outside the law and run the risk of penalties for themselves and their clients.

Taxpayers are cautioned to avoid tax preparers who:

• · Claim they can get bigger refunds than other tax preparers.
• · Base their fee on a percentage of the refund amount.
• · Refuse to sign the tax return as the paid preparer even though it is required by law.
• · Do not provide a copy of the tax return for the taxpayer’s records.

FTB Publication 982, How to Select an Income Tax Return Preparer offers more guidance on choosing a tax professional.

Taxpayers should make sure their preparer is a licensed certified public accountant (CPA), enrolled agent, attorney, or a registered tax preparer.

California requires anyone preparing state and federal tax returns for a fee and who is not an attorney, CPA or enrolled agent to register as a tax preparer with CTEC. Each CTEC-registered tax preparer must complete courses on federal and state tax laws each year, plus obtain a $5,000 surety bond to protect clients against fraud.

Unregistered individuals are issued a $2,500 penalty, which doubles if the individual continues to prepare returns. Last year, FTB assessed 45 tax preparers with penalties for failing to be properly licensed or registered.

If taxpayers suspect a tax preparer is fraudulent, they should inform FTB online at ftb.ca.gov by selecting “Report Tax Fraud” under the online services, or by calling 800.540.FILE (3453). If a tax preparer cannot be verified as an attorney, CPA, CTEC-registered tax preparer, or enrolled agent, consumers are asked to fill out a “Noncompliant Complaint Form” at www.ctec.org.

Islip + Company CPAs offer personalized service to help you with these issues.

Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.

With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing. 

It's not about the numbers...it's what's behind the numbers that counts.

Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Welcome to Islip + Company, LLP, a full-service certified public accountant and consulting firm in Sacramento. For over 52 years, we have provided financial and management services to a diverse and successful client base. Our clients' satisfaction and success are our priorities. We are committed to providing quality work in a timely manner and are noted for our personal service. We value the trust our clients place in us, and we work to earn their business every day.

All accounting and consulting firms are not alike. We invite you to compare.

Selecting a rock-solid Certified Public Accountant (CPA) should be one of the first steps taken for anyone starting a small business. An accountant worth their weight in ledgers will not only help you plan and prepare your business taxes, but can also advise you on key decisions that will help you start and manage your small business. Selecting an accountant will likely be one of the most important decisions you make as a budding entrepreneur.

A good accountant can save your business thousands of dollars and save countless hours in your valuable time. Conversely, a poor accountant's mistakes will eat into your profits, cause you ongoing, undue aggravation and can often land you in the scrupulous crosshairs of the Internal Revenue Service. With these important factors on the line, how do you go about selecting an accountant, especially if you have never used one before?