Nobody wants to be audited by the IRS. Although very few individual taxpayers are audited, for those who are selected it is costly, stressful, and extremely time-consuming. A tax audit can lead to additional bills that average $21,918. Dealing with an audit is difficult. It is far easier to do your best to avoid one in the future. Small business owners and the self-employed are often at a slightly higher risk. Other risk factors include a very high or very low adjusted gross income. Here are some ways to avoid being audited:
#1: Know Your Risk
Accountants are at surprisingly high risk because they normally keep their own books. Other risk factors include being in a cash business, filing a Schedule C, or making an unexpectedly high charity deduction. If you do the last, keep the cancelled checks or other documentation.
#2: File Electronically
Most tax filing software will flag problems for you and you have a higher chance of spotting an error. One of the largest causes of audits is a data entry error. The IRS reports a 21 percent error rate for paper returns…and 0.5 percent for e-filing. The extra cost may be worth it for the peace of mind.
If you file a Schedule C and file losses for three years or more, then you greatly increase your chance of being audited. It is worth considering not deducting all of your expenses. Make sure anything you claim really is deductible. For example, if you use your smartphone 90% for playing games but make the occasional business call on it, you may be better off not deducting it. If you take the home office deduction then you must not be using the office for any purpose other than business, and it should be a separate part of your home.
#3: Avoid Filing an Amended Return
Amended returns are always going to be scrutinized, and they may find a mistake other than the one you are fixing. You need to make sure you do your return correctly the first time.
#4: Check Your Math
Double check everything. Make sure that the numbers you enter match those submitted by your employer. Also, make sure that you keep deductions within their limitations. Never round anything off. Simple math errors are unlikely to warrant a full audit, but will definitely attract their attention. Don’t leave any blank checkmarks even if you think they aren’t relevant.
#5: File a Little Later in the Season
Some people even argue that you should request an extension. Unless you are expecting a high refund, there is no reason to file early. The system tends to flag more returns early in the year, and the IRS generally limits the number of audits to match their budget and personnel.
#6: Keep All of Your Receipts
Especially if you are itemizing deductions or filing a Schedule C. This is particularly important for home office deductions, medical expenses and business travel.
#7: Be Honest on Your Return
It should not need to be said, but the IRS is looking for people who are lying.
#8: Use the Simplest Filing Method you Can
If you can get away with using 1040-EZ, especially if you are a renter and have no children, then you have basically no chance of being audited.
#9: Log Expenses at the Time You Make Them
A lot of people are tempted to make a log at the end of the year, but this greatly increases your chance of making a mistake. If you are spending money to entertain a vendor or similar, keep their identity in the log, just in case.
#10: If the IRS Does Ask you Questions, Respond Immediately
The vast majority of audits are what are called “correspondence audits.” This might be somebody asking you why you stayed over at a conference that was only twenty miles away – for which a legitimate answer might be that programming ran late at night or you had a networking opportunity that kept you on site. The faster you respond, the fewer penalties you will face if you do owe additional tax and the more likely it is that they will be sympathetic.
The last thing to remember is that IRS audits, for anyone except the extremely wealthy, are vanishingly rare. Even when you do get audited, it’s more likely to be an IRS employee asking to see some receipts than somebody coming into your home or office to take apart your files. Hiring a good tax preparer can both reduce your risk of an audit and make one less painful if you are selected. If you need an accountant or tax preparation, or more advice on avoiding audits, contact TPI today.