Why the IRS Will Audit

1. Your income is high or low. The reasoning is simple: higher earnings may lead to larger errors, and lower earnings may lead to incorrect deductions. The adjusted gross income (AGI) range with the least audit risk is $25,000 to $200,000. As your income moves toward the extremes in either direction, the chance of an audit increases.
2. You fail to report all your income. The IRS Automated Underreporter Program matches W-2 and 1099 information with the information you report on your tax return. When a mismatch occurs, expect to receive an automated CP2000 notice from the IRS that notifies you of the discrepancy and the additional tax due. And remember, even if you do not receive a 1099, you are required to report any income.
3. You own a business. Rules regarding business deductions are confusing and constantly changing. The IRS knows this. Incorrectly deducting personal expenses or having your business classified as a hobby, thereby eliminating deductions, can get you in trouble with the IRS. Cash-heavy businesses are under increased scrutiny due to higher rates of fraud. Solid tracking processes and good records are necessary for income and expense substantiation.
4. You make a math error. The IRS issued over 1 million math error notices in 2024, the most recent year for which statistics are available. The biggest culprits were tax liability and credit calculations. Math errors can create a two-fold problem for you. Additional tax owed and more scrutiny applied to other parts of your tax return.
5. You claim the earned income tax credit. According to the IRS, up to 33% of EITC payments are paid in error. Numbers that large are sure to get the IRS’s attention. Confusion over eligibility and calculation errors are mostly to blame.

What to do when audited

While some risk factors are beyond your control, you can minimize many. If you are selected for an audit, don’t handle it alone; please contact our RRBB advisors.

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Simple bookkeeping tips

1. Record small expenses consistently. Small expenses like coffee meetings, parking, subscriptions, and quick purchases are easy to lose track of. Left untracked, they turn into forgotten receipts and add up to significant missed deductions over time. Capturing these expenses consistently can immediately increase your total deductions. What feels insignificant day-to-day can meaningfully lower your taxable income by year-end.
2. Reconcile monthly, not annually. Many business owners think of reconciliation as only something for bank accounts. But it’s also for all asset, liability, and equity accounts. It’s much easier to double-check your numbers every month than to wait until year-end, when something may become a bigger problem. Keeping your records accurate helps ensure that every legitimate expense, and by extension every tax deduction, is accounted for before it’s forgotten.
3. Be intentional about when you pay and collect. Cash-based businesses recognize income when it’s received and expenses when they’re paid, which means the exact timing of when you send invoices or pay bills directly determines when that income or expense shows up on your tax return. Start now by consistently recording income when it’s received and expenses when they’re paid. As year-end approaches, you can lower taxable income by accelerating expenses or postponing invoices until the following year.

Additional considerations for business owners

1. Separate your accounts cleanly. Blurring business and personal spending in one account can potentially inflate your tax bill, bury legitimate deductions, and raise red flags if your records are ever reviewed by the IRS. Clean separation makes every expense easier to justify and capture. You keep more deductions and give your accountant clearer data to work with.
2. Separate owners’ pay from other business expenses. Mixing owner pay with regular business expenses can potentially create confusion and distort your financials. Without clear separation, it’s harder to track true profitability and apply the right tax treatment to your income. Cleanly separating salary, draws, or distributions gives you a clearer picture of your business’s performance. It also helps ensure your income is taxed correctly and avoids costly misclassification errors.

If properly implemented, your bookkeeping system will produce accurate financial statements that support key financial decisions. Feel free to contact our RRBB advisors to discuss bookkeeping solutions or to improve your business’s finances.

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Lower your tax obligation in 2026

1. Check on your withholdings. Review your taxable income and the amount of tax you’ve paid to Uncle Sam so far this year. How do the numbers compare to last year? Based on your analysis, you may have to adjust your paycheck withholdings or make estimated tax payments during the balance of the year to avoid underpayment penalties or a surprise tax bill. Remember to pay special attention if:

• You have a tip income
• You have overtime income
• You or your spouse is eligible for the special senior deduction (over age 55)

2. Build up your retirement accounts. Pump up your retirement savings during the remainder of the year. In fact, setting aside more money for retirement can lower this year’s tax bill. For instance, if you have a 401(k) plan at work, you can defer up to $24,500 of salary in 2026, plus an extra $8,000 if you’re age 50 – 59 and over 64 ($11,250 for ages 60 – 63).

3. Identify potential taxable events. It’s easy to overlook one-time events that will have an impact on your 2026 tax liability. For instance, if you win a prize at a church raffle, the prize is generally taxable to you. Perhaps you changed jobs, lost a child as a dependent, or got married. Each of these events can create a change in your tax obligation. Review your records now to avoid any unpleasant tax surprises later.

More ideas if you are self-employed

4. Consider business property needs. If you acquire business property, you can often choose to write off the cost in the first year the property is placed in service under the latest tax laws. If it makes sense, consider combining the benefits of the Section 179 expensing deduction, up to a maximum of $2.56 million (indexed for inflation), with 100% bonus depreciation for both new and used property.

5. Account for gig taxes. Finally, workers in the gig economy (like Uber and Lyft drivers) should understand the basic tax rules. Generally, income from such jobs is fully taxable, but you may be entitled to offsetting deductions. Essentially, you’re treated like a self-employed individual. Estimated quarterly tax payments are often required for these workers.

Should you wish to have your situation reviewed, contact our RRBB advisors today. It’s better to be prepared than surprised when it comes to your tax obligation.

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Understanding the gift-giving tax

You may give up to $19,000 (up $1,000) to any individual (donee) within the calendar year 2026 and avoid any gift tax filing requirements. If married, you and your spouse may transfer up to $38,000 per donee. If you give a gift to your spouse who is not a U.S. citizen, the annual exclusion amount for 2026 is $175,000.

How to report the gift tax

• Amounts given in excess of this annual amount are subject to potential gift tax reporting. The amount of tax is currently unified with estate taxes, with a maximum rate of 40%. The donor of the gift is responsible for paying any associated tax. When you exceed the annual gift-giving amount, this triggers the need to file a gift tax form with your individual tax return. The excess gift amounts are netted against your lifetime unified credit. If your lifetime gifts do not exceed the credit, you may not owe additional taxes. Here are some instances when a gift tax problem may occur and ways to manage the problem:
• Gifts for college. Grandparents like to help with the tremendous cost of a college degree. Donations can quickly exceed the annual gift threshold. To avoid the gift tax, consider making payments directly to the college. This form of payment is excluded from the annual gift-giving limit so long as the funds are not used to pay for books, room, or board on behalf of the donee.
• Be careful with 529 plan funding. If your children are anticipating going to college, many consider creating a 529 college savings plan. You may then fund the savings plan (or have someone else fund it) on your child’s behalf. However, remember that deposits into 529 accounts are treated as gifts and are subject to the annual gift tax limits.
• Gifts to cover medical expenses. It is very easy to mount up a large medical bill. While you may want to step in and help by paying the individual’s medical bills, you may create a gift tax obligation. Better: make payments directly to health care providers for medical services on behalf of the patient to avoid gift tax exposure.
• Gifts to help make a down payment. It is becoming more common for family members to help their kids with the down payment on a first home. This can be tricky. Lenders will look for recent deposits in bank accounts and ask the prospective buyers to substantiate the source of funds. Providing the funds as a loan may disqualify the couple from obtaining a mortgage. Even worse is if the purchasing couple claims the funds are a gift. This action may create a gift tax obligation to the person providing the funds. You must ensure you provide an accurate audit trail to demonstrate that the gift does not exceed the annual limit.
• Gift of real estate. If you give property to a relative for little or nothing in return, you may need to file a gift tax form. Recent IRS studies suggest that over 50% of taxpayers fail to declare property transfers as gifts.

Other things to consider

You may provide gifts to or receive gifts from anyone. There are no limits or restrictions on who you may give a gift to or who may provide a gift to you. Creative gift-giving can be a useful way to help someone in need without creating a tax obligation.

Do not give a lump-sum gift for the maximum amount. If you provide a gift to an individual for the maximum allowable amount, you may not provide any other gifts to that person during the year. Otherwise, the event would be deemed excess gift-giving and require filing a gift tax form. For example, a grandmother gives her granddaughter $19,000 for college. She also pays for a family vacation to Disney World and provides a wonderful birthday gift. Technically, the additional gifts exceed the annual limit and would constitute a gift tax event.

The IRS is paying close attention to the massive noncompliance with the annual gift tax filing deadline. So much so that it is actively researching property transfers in key states to ensure the gift tax filing is taking place.

You may never need this tip, but if you do and you are unaware of this tax law, your tax life can get complicated quickly. Your main takeaway when understanding the gift-giving tax? Identifying when to ask about filing the gift tax form. Contact our RRBB advisors for more information or if you have any questions.

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Shifting income rules

In 2026, the first $1,350 of unearned income for each child is not taxed, and the next $1,350 is taxed at the child’s normally very low tax rate. Any earnings above $2,700 are taxed at the parent’s tax rate. Unearned income typically includes interest, dividends, royalties, and investment gains. As long as your child is under 18, or 24 if a full-time student, these rules apply.

Transfer enough income-producing assets to each child to approach the annual unearned income limits as closely as possible. Depending on your marginal tax rate, you could save as much as 37% on federal income taxes for the transferred amounts.

In addition to unearned income, consider investing in assets with long-term appreciation. This may help manage the timing and rate of capital gains taxes when selling the investment. For example, if you transfer assets in your child’s name and your child buys Amazon stock after the dot-com bubble for less than $10 per share. At age 25, the shares are worth $100,000+, but her first job out of college doesn’t pay much. So you sell a few shares of the appreciated stock and avoid capital gains tax altogether because of her lower income!

Remember that excess investment income may be subject to an additional 3.8% investment income surtax. Any investment income that can shift to your children could also save you this additional tax bite as well. However, moving assets from you to your children may affect their eligibility for college financial aid. Make sure to consider how your tax strategy affects college financing as they get older.

Leverage your children’s earned income

Wages your children earn are considered earned income. If you own a small business, finding ways to employ your children can be a way to shift income from your higher tax rate to their lower rate. Be careful, as you must be able to defend the work your child is doing and the amount they receive for that work. Some ideas include:

• Have your child clean your office a few times per week
• Put your child in charge of making local business deliveries
• Use your child in an advertisement for your business
• Have your child help assemble items or assist with mailings

Additional Tip: If you are a sole proprietor, you may hire your dependent children under age 18 and do not need to pay Social Security and Medicare taxes.

There are many opportunities to leverage the tax advantages of having children. Reach out if you would like help creating a plan for your family. Contact our RRBB advisors for more information or if you have any questions.

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1. Make sure your charity is eligible. Only donations to qualified charitable organizations registered with the IRS are tax-deductible. You can confirm an organization qualifies by calling the IRS at (877) 829-5500 or visiting the IRS website.
2. Get receipts. Get receipts for your deductible contributions. You don’t file the receipts with your tax return, but you must keep them with your tax records. You must get the receipt at the time of the donation, or the IRS may not allow the deduction.
3. Keep track of mileage. If you drive for charitable purposes, this mileage can also be deductible. For example, you can deduct the miles you drive to deliver meals to the elderly, volunteer as a coach, or transport others to and from a charitable event at 14 cents per mile. You must maintain a mileage log to substantiate your charitable driving.
4. Take extra steps for noncash donations. You can make a contribution of clothing or household items you no longer use. If you decide to make one of these noncash contributions, it is up to you to determine the value of the contribution. However, many charities provide a donation value guide to help you determine the value of your contribution. Your donated items must be in good or better condition, and you should receive a receipt from the charitable organization for your donations. If your noncash contributions are greater than $500, you must file a Form 8283 to provide additional information to the IRS about your contribution. For noncash donations of more than $5,000, you must also obtain an independent appraisal to certify the value of the items.
5. Pay attention to the calendar. Contributions are deductible in the year they are made. To be deductible in 2017, contributions must be made by December 31, with an exception. Contributions by credit card are deductible even if you don’t pay off the charge until the following year, as long as the contribution is on your credit card statement by December 31. Similarly, contribution checks written before December 31 are deductible in the year written, even if the check is not cashed until the following year.
6. Itemize. You must itemize your deductions using Schedule A in order to take a deduction for a contribution. If you’re going to itemize your return to take advantage of charitable deductions, it also makes sense to look for other itemized deductions. These include state and local taxes, real estate taxes, home mortgage interest, and eligible medical expenses over a certain threshold.

Remember, charitable giving can be a valuable tax-deductible donation, but only if you take the right steps. Contact our RRBB advisors for more information or if you have any questions.

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Start a 529 education savings plan

529 education savings plans are a great way to start saving for a baby’s future educational costs. These plans offer investments that grow tax-free as long as the funds go toward eligible education expenses (including elementary and secondary tuition). States administer these plans, but that doesn’t mean you are stuck with the plan available in your home state. Feel free to shop around for a plan that works for you. Starting to save early maximizes the amount of tax-free compound interest you can earn in the 18+ years you have before kids go to college.

Bonus tip for family and friends: Anyone can contribute up to $19,000 to the plan in 2026 for each child! In addition, there is a special provision for 529 plans that allows up to 5 years’ worth of gift contributions at once. This is a great estate-planning strategy for grandparents.

Update Form W-4

Every year, you need to review your tax withholdings, especially if you have dependents. Remember, the birth of a child brings new tax breaks, including the $2,000 Child Tax Credit and the Child and Dependent Care Credit for childcare expenses. These credits can be used now to reduce tax withholdings and increase take-home pay, helping cover the cost of diapers and other needs that come with babies and children.

On the other side of the coin, these benefits fall away as your kids grow older. The Dependent Care Credit is for children under age 13. The Child Tax Credit is available for children under age 17. You must plan accordingly.

Prepare for medical expenses

Having a baby is expensive. So is watching your kids grow up! Fortunately, there are ways to be tax-smart when covering predictable medical and dental expenses. The first step is to pay as many out-of-pocket expenses as possible with pre-tax money. Many employers offer tax-advantaged accounts such as a Health Savings Account (HSA) or a Flexible Spending Account (FSA). So check this out and fund these accounts as much as possible. And while it’s more difficult to claim medical expenses as an itemized deduction, it’s impossible to do so if you don’t keep receipts.

Children can be expensive. Contact our RRBB advisors to make sure you’re getting all the tax breaks you deserve for having kids!

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Step 1: Take inventory of your income sources

Most income falls into a few core categories like wages from an employer, self-employment, freelance work, investment earnings, and any side income you pick up along the way. Other types of income you may have include:

• Retirement income (pensions, Social Security, IRA, or 401(k) withdrawals)
• Rental income from real estate
• Business distributions (for S-corp or partnership owners)
• Interest from savings accounts or bonds

If you aren’t sure, take a moment and look at last year’s tax return. It’s a great place to start. Then consider any changes you expect.

Step 2: Get familiar with the different types of taxes

Not all income is taxed the same way. And these differences can add up quickly.

• Wages are subject to a progressive income tax from 0% to 37%. So know the rate your next dollar of tax will pay. Also, don’t forget wages are subject to payroll taxes like Social Security and Medicare (7.65%).
• Self-employment and freelance income are subject to the same tax rates as wages, except that most don’t automatically withhold taxes and may also be subject to self-employment tax (15.3%). So planning here needs to consider quarterly estimated tax payments.
• Investment earnings can be subject to a variety of tax rates, including interest and short-term capital gains (up to 37%), qualified dividends (0% to 20%), and long-term capital gains (0% to 20% depending on the holding period and income type).
• Retirement income may be fully taxable (up to 37%), partially taxable (varies), or tax-free (0% for certain Roth distributions).
• Rental income is generally taxed at ordinary income rates (up to 37%), though deductions can decrease your total taxable income.
• Business distributions vary by entity and may be taxed at ordinary income rates (up to 37%) or pass through with no additional tax at the distribution level (varies).

Step 3: Tips to manage your tax burden

• Align your tax payments with how you actually earn. If a growing portion of your income is coming from somewhere outside a traditional job, withholding alone may not cover your tax liability. W-2 income is handled automatically, but freelance, investment, or rental income often requires quarterly estimated payments to avoid penalties.
• Use withholding and estimates together. Adjust paycheck withholding to pair it with estimated payments when income is uneven or comes from multiple sources.
• Pay attention when your income changes. These income shifts can catch people off guard, leading to a higher tax bill if they don’t adjust their plan early in the year.
• Be intentional about when income and expenses hit. Sometimes you have control over when you earn income or pay expenses. Used correctly, adjusting your timing can help smooth out your tax bill, especially if you’re self-employed or have investment income.
• Check your plan throughout the year. Your income mix can change quickly, and small updates can make a big difference. A quick review during the year can help you stay on track and avoid surprises later.

By understanding your income sources, how each is taxed, and how to align your payments and timing strategies, you can take a more proactive approach to managing this year’s tax bill. Contact our RRBB advisors if you have any questions or are ready to create your 2026 tax plan.

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529 college savings plans

With a 529 plan, anyone can open a college savings plan for any current or future student as long as they are a U.S. resident, have a valid tax ID, and are 18 or over. The deposits are made using after-tax dollars. As long as the funds are for qualified educational expenses, there is no tax on the earnings on the investments in the account. The account is specifically for a beneficiary (including yourself), but the account holder controls the funds on their behalf.

Some states offer an annual deposit. Therefore, an individual can contribute up to the annual gift tax limit, currently $19,000 or $38,000 for a couple. The 529 plans are sponsored by individual states, but you are not required to open an account in your state of residence. You may wish to, however, as some states give you a tax break on your deposits.

Additionally, you can now use the funds to pay for kindergarten through 12th-grade education and college costs. Qualified expenses also include college tuition, fees, books, supplies, room & board, computers, and internet access.

How to take advantage

• Open it early. The sooner you start, the more money is available for education.
• Anyone can open the account. The beneficiary is the student, but the account holder can be almost anyone. Typically, this is a parent or grandparent, but it can also be an account for a nephew, niece, or family friend.
• Review multiple states’ plans. They are not all equal. Some states’ 529 plans provide better investment options and have better-managed returns than others.
• Roll over unused funds. If your youngster does not need the funds, you can transfer unused funds without tax implications as long as it is to a member of the family. This is pretty broad as it includes brothers/sisters, nephews/nieces, parents, cousins, in-laws, and even the account holder.
• Take full advantage of the benefit. You can now use the funds for more than college expenses. Up to $10,000 per year can be used for K-12 tuition, and $10,000 (lifetime limit) can be used for student loan repayments. Even registered apprenticeships qualify.
• No age limit. And unlike other programs, there is no age limit to contributions. States often impose limits on the aggregate value in accounts, so you need to be aware of them. But understand that at some point, other savings vehicles are often better tax instruments. This includes Roth accounts and other IRAs. There are no limits on the use of funds for qualified educational expenses.
• Funding multiple years. There is even a provision to fund multiple years of gifts (super gifting up to 5 years) in a single year. If you want to consider this option, it’s best to ask for help, as it will require some tax reporting.

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Tip 1: Expect a letter first

In almost every case, the IRS will send you a letter by standard mail if it needs to contact you. This will alert you to expect future communication from the agency and instruct you on the best ways to contact them. If you receive an unexpected or suspicious letter from the IRS, it should include a form or notice number that is searchable on the IRS website at www.irs.gov. If something doesn’t look right, you can call the IRS help desk at 1-800-829-1040 to question it.

Tip 2: Never over email

Don’t respond to any email communications supposedly from the IRS. Don’t click on any links. Delete the email or forward it to phishing@irs.gov to help catch the scammers. The IRS will never initiate contact with you using email. A common scammer trick is to send emails to taxpayers using accounts and graphics that imitate the agency’s logo. These emails may threaten imprisonment or fines if you don’t pay up or promise an extra refund if you send money to “prepay” your taxes. Often, the emails contain links to an official-looking fake website to collect payments. Clicking on them may also trigger the installation of virus programs on your computer.

Tip 3: Proper phone call etiquette

After notification via the USPS, the real IRS may call to discuss options for handling delinquent taxes or an audit. A real IRS agent or a debt collector won’t demand immediate payment without giving you an opportunity to question or appeal the bill. Nor will they threaten lawsuits, arrest, or deportation. Their tone should not be hostile or insulting. Finally, if they ask for payment, they should only ask you to make payments to the United States Treasury.

If you get a call from the IRS or an IRS debt collector, politely ask for the employee’s name, badge number, and phone number. They shouldn’t hesitate to provide this information. You should then end the call and dial the IRS at 1-800-366-4484 to confirm the person’s identity.

Tip 4: Check in-person visits

Ask the person for their credentials. Every IRS agent can produce two forms of credentials: a pocket commission card and a personal identity verification card issued by the Department of Homeland Security, also known as an HSPD-12. Never provide sensitive information or confirm information they may have without first independently verifying they are legitimate representatives of the IRS. If you have concerns, call the IRS at 1-800-366-4484 to confirm the person’s identity.

You do not need to navigate this problem on your own. Call immediately for assistance. It is good to have a knowledgeable expert on your side. As always, feel free to contact our RRBB advisors for more information or if you have any questions.

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