“Repair expenses” and IRS “audit efficiency”
This short article is about more than deductions for repair expenses; it is also about the new IRS “audit efficiency” being employed by the IRS with good results. At least these results are good from the IRS’s point of view.
The Good News. “Repair expense” deductions are being liberalized!
The IRS is liberalizing the requirements for deducting “repair expenses”! This is good news. The IRS’s announcement is at the end of this article; take time to read it.
In a move that is consistent with recent IRS decisions that ease the requirements necessary to take a tax deduction, it is now easier (and safer) to deduct repair expenses. This effectively removes a common tax audit issue from consideration and this decision is good for taxpayers and for the IRS.
It’s good for taxpayers because repair expenses reduce taxes. Historically the issue with repairs is are they tax deductible or must they be capitalized and subjected to depreciation overtime. Obviously this is good for taxpayers.
The Dark Side of the Force!
Do not forget that this decision is also good for the IRS. Congress has “slashed” the IRS’s budget and sharply reduced the number of qualified IRS tax auditors. These budget cuts have made it necessary for the IRS to rely on more efficient audit techniques. This decision along with a series of other IRS announcements take nickel and dime tax audit issues off the table allowing the IRS to focus their audit strategy more efficiently. This “audit efficiency” allows an IRS auditor to focus on big dollar tax audit issues.
Part of the IRS improved “audit efficiency” is how tax returns are selected for audit. The last few IRS audits that I have been engaged in all have one common factor: the tax returns were filed late! Delinquent tax returns are being targeted for good reason. The IRS has determined that people who tend to file delinquent tax returns often have poor accounting records. Frankly, the IRS is correct!
This is one simple way to reduce IRS audit risk: File. On. Time!
The other part of the IRS’s drive for better “audit efficiency” is to single out unusual big dollar tax deductions or other tax issues. Things like casualty losses, §1031 & §1033 exchanges, basis limitations and large NOLs are all subject to increased IRS audit scrutiny.
The tax planning principal required is, likewise, simple: make sure that your tax records for big dollar tax issues is neat, clean, organized and accurate. And – always file on time!
So, the rumor that you have heard is true; the IRS has fewer auditors. It’s also true that the IRS will engage in fewer audits. But; and “but” is a big word; that does not mean that your IRS audit risk is lower. The improved IRS audit efficiency is making the IRS audit selection process more effective selecting tax returns and discovering the big dollar tax errors hidden in these tax returns.
My message is clear: do not relax your diligence in preparing your tax and financial records.
The IRS’s News Release:
De Minimis Safe Harbor for Deducting Repair Expenses Increased to $2,500: Under the Tangible Property Regulations (TPRs), businesses must generally capitalize amounts paid to acquire or produce a unit of property. However, businesses can make a safe-harbor election to currently expense a de minimis amount of such expenses. The de minimis amount for a business without a Applicable Financial Statement (AFS) (basically, an audited financial statement or one required to be filed by the SEC) is $500 [Reg. 1.263(a)-1(f)(1)(ii)(D) ]. [Note: This amount, which applies to many small businesses, has long been criticized as not nearly large enough.] The IRS has now increased the de minimis safe-harbor amount for a business without an AFS to $2,500, effective for costs incurred in tax years beginning after 2015. However, the IRS will not challenge this issue in pre-2016 years if the other requirements of Reg. 1.263(a)-1(f)(1)(ii) are met. IRS Notice 2015-82, 2015-50 IRB and News Release IR 2015-133.