Nobody likes to be audited or questioned by the IRS. Although it is rare for individual taxpayers to be audited by the IRS, it can be costly, stressful, and time-consuming. Additional bills can result from a tax audit, which averages $21,918. It is not easy to deal with an audit. It is much easier to try to avoid an audit in the future. The risk for self-employed and small business owners is higher. Another risk factor is a very high or very low adjusted gross income. These are ways to avoid being audited.
#1: Understand Your Risk
Accounting professionals are exposed to a surprising amount of risk because they usually keep their books. Another risk factor is being in a cash-based business, filing Schedule C, or making an unanticipated charity deduction. Keep the canceled checks and other documentation if you do the latter.
#2: Upload Electronically
Tax filing software can flag errors for you, giving you a better chance of finding them. Data entry errors are the leading cause of audits. According to the IRS, there is a 21% error rate on paper returns and a 0.5 percent error rate when e-filing. For peace of mind, it may be worth the extra expense.
You have a greater chance of being audited if you file a Schedule C and keep losing for at least three years. You might want to consider not deducting all expenses. It would help if you verified that any expense you claim is deductible. Suppose you only use your phone 90% for gaming but occasionally make business calls on it. In that case, it may not be worth deducting. If you take the deduction, you cannot use the home office for anything other than business purposes. It should be an independent part of your home.
#3: Do not file an amended return
Amended returns will always be examined and may reveal a mistake you have not corrected. It is important to complete your return correctly the first and last time.
#4: Make Sure You Have the Right Math
Double-check everything. Double-check everything. You should also ensure that your deductions are within limits. Don’t round up anything. While simple math mistakes are unlikely to merit a full audit, they will be noticed. Do not leave blank checkmarks, even if they seem irrelevant.
#5 – File a little later in the Season
Some even suggest that you should ask for an extension. Unless you expect a large refund, it is not advisable to file your return early. The IRS limits the number and budget of audits it performs, so the system tends not to flag as many returns early in the year.
#6 – Keep all of your receipts
Particularly if you are itemizing deductions and filing a Schedule C.
#7 – Be Honest about Your Return
This should not be necessary, but the IRS is looking for people who lie.
#8 – Use the simplest filing method
You have virtually no chance of being audited if you can use 1040-EZ, particularly if you’re a renter with no children.
#9 – Log expenses at the time you make them
Many people feel tempted to keep a log at year’s end, but this increases the chance of making mistakes. Keep track of whom you are paying to entertain vendors or similar people.
#10 – Respond immediately
Correspondence audits account for the majority of audits. This could be someone asking why you went to a conference twenty miles away. A valid answer might be that you were tired or took advantage of a networking opportunity. If you do owe additional taxes, the penalties will be less severe if you respond quickly. They will also be more likely to be sympathetic.
Remember that IRS audits are rare for everyone except the very wealthy. Even if you are audited, it is more likely that an IRS employee will ask for receipts than someone coming into your house or office to examine your files. A good tax preparer will reduce the risk of being audited and make it less painful if you are chosen. Contact Tax and Law Research Inc. today if you require an accountant, tax preparation, or additional advice on avoiding audits.