9 Smart Ways to Steer Clear of a Tax Audit
A tax audit is nothing to take lightly. On an anxiety scale of one to ten, a tax audit could very well be a ten. Audits can sometimes be bad and result in a significant tax bill. However, if you receive a tax audit notification you should not panic. Audits come in all forms. Some are minor and some can be extensive. They all follow a defined set of rules. Click here to read or watch more IRS Help resources.
If you have an idea of what to expect and your knowledge of the process is up to speed, your audit may not end up being as bad as you might have imagined. IRS audits fall into three categories: mail, office, and field.
These audits are fairly routine and comprise about 77 percent of all audits. You can mail in your document that will usually ask specific questions or requests.
Office and Field Audits
These audits can be much more serious. The IRS asks for specific information to validate credits and deductions and will also take a close look at your lifestyle, business activity, and sources of reported income. They will look closely to see if everything matches information on your tax return.
Few people are prosecuted for tax evasion each year. The IRS reserves the honors for the most egregious tax dodgers.
That being said, there are a number of ways to avoid a tax audit—all legal. Millions of people get the dreaded notice each year. You can avoid being on the list by taking advantage of the following considerations.
Become very familiar with the IRS selection process.
Most people assume that the process for audit selection is random. Actually, that is not the case. The IRS flags potential candidates using its Discriminate Income Function (DIF) program. A person’s deductions are weighed in comparisons with others in that person’s income bracket. It makes sense. It is a way to determine if a tax filing sticks out like a sore thumb.
Taking every legal deduction allowable is not a crime. You should just make sure that you have the documentation to back everything up. On the other hand, there will always be that small bunch of taxpayers who are selected as if from some magic wave of the wand.
Be aware of those who are likely to be targeted with an audit.
If you are in the type of business where you keep your own books, you raise the odds of being audited. These professions include doctor, lawyer, waitress, bartender, and hairdresser etc.
Just keep in mind that you will need to keep very meticulous records of your business, where you travel, expenses, and what you purchase. If you are not already in the habit of keeping meticulous records, it might be a good time to start. Again, there is no need to look over your shoulder. Just handle your business in a very professional manner.
If you are self-employed, consider incorporating your business.
Some choose to file a Schedule C as a self-employed taxpayer. This could increase their chances of being audited. Some consider forming a limited liability company (LLC). These companies, along with corporations, are audited less frequently than other businesses. LLCs also permit more expense deductions.
The best advice here is to consult with an attorney who handles these types of transactions. Unfortunately, small businesses happen to be some of the IRS’s favorite targets. Stay informed, legally, and keep immaculate business records. You never know when your number will come up for an audit.
Be familiar with questions the IRS will most likely ask.
The IRS will commonly flag bad debt expenses, deductions for home office, medical expenses, casualty losses, business travel, meals, and entertainment expenses. Take your deductions, but make sure they are all legitimate. Remember, you are being audited with respect to filings that are similar to yours.
If your tax return sticks out like a sore thumb, expect an audit sooner or later. Once again, keeping precise records is the key.
Know the best times to file your tax return.
This is something that you should not leave to chance. This is where the help and advice of a qualified tax attorney can be most beneficial. There are just some things that should not be left to chance where your taxes are concerned.
A professional tax attorney is on top of the latest laws and is always aware of new trends that may affect you. Everyone knows the filing date is usually April 15 of each year. You can avoid a penalty by filing taxes on time. If you expect a hefty refund, go ahead and file your taxes on time. If filing late, the IRS will simply deduct any late penalty fees.
Always check, and recheck your filing.
This should be a standard practice for anything that involves important paperwork. Double check all the math. If there are deductions for medical expenses, etc., then the IRS understands small math errors. However, if your errors seem forced and on purpose, you may find yourself in the middle of an audit.
This is another reason to have your taxes professionally prepared. There are too many things that can go wrong when trying to go it alone. Many business owners spend most their time focusing on running their business. When tax season comes around, they are often too busy to truly stay focused on filing effective and correct tax returns.
Be exact and neat.
When it comes to taxes, the wise ones remember all the past lessons. Never round off your tax numbers. Always make sure they are neat and legible. Recheck your penmanship. Writing neatly can save you a lot of time and headaches down the road.
The last thing you want is to cause IRS agents stress I having to figure out what you wrote. Your state and federal tax returns should match perfectly. Check and recheck your work.
Pay attention to detail and leave nothing blank that should be filled in.
Who knows the number of audits initiated because a single line was left blank? One empty space can cause you more trouble and pain than you know. Every question should be answered, and every line filled in, even if with a dash or a zero. Never give the IRS room to assume anything.
Of course, there is always the possibility of being chosen for an audit regardless of how careful you have been. Maintaining complete, thorough, and organized records is the key to surviving an audit. If audited, things should go smoothly if there is nothing to hide and you have all the documentation you need to back up your tax return.
Be precise with your explanations.
Even if you have never been audited, you should always go the extra mile and include forms, receipts, worksheets, and other documents that can explain and validate your tax return. If there are inconsistencies, the additional information you sent will be able to clear them up. Most inconsistencies center around deduction amounts, dependents, and income.
Be careful about filing amendments. They can raise a red flag and cause the IRS to trigger an audit of past returns. Take every precaution to file your original taxes properly. If anything is worth doing right—it is worth doing right the first time around.
Why Hire a Tax Professional?
There are a number of reasons to hire a tax professional. Everyone knows it makes sense. For many people, it is just a matter of making the call.
• Hiring a tax professional removes the hassle from having to file yourself.
• It takes a qualified tax professional to keep with the endless amount of tax laws and amendments.
• Mistakes can be quite costly, and they can compound over time if not handled properly. The last thing you want is to end up on the IRS’s radar screen.
• Only a professional tax preparer can represent you in an audit. A tax program cannot.
• Time is always money. Simply add up the hours you would spend doing your taxes and consider what it would cost to have them done professionally.
• A qualified tax attorney or professional can always answer questions and help you make well-informed decisions.
• Gain access to a tax professional who can help you plan year round, and for the years ahead.
• Your tax professional can recommend numerous ways to help you save on your taxes.
• There is nothing that can replace your peace of mind. Professional tax preparers do it for a living. They know the ropes and can help you navigate the concourse.