IRS Audit: Decrease Your Risk But Be Prepared

//IRS Audit: Decrease Your Risk But Be Prepared

IRS Audit: Decrease Your Risk But Be Prepared

The thought of an audit by the IRS causes a chill to run down the spine of most taxpayers. It seems as if we have no control over who will get audited and what the IRS can do to us. Most audits are not really that ominous, but it’s still something to be avoided if possible.

In reality, less than 1% of taxpayers are audited in any given year. Although every year the IRS performs a handful of random audits, the vast majority occur because something triggered them. Avoid the triggers and your chances of being audited drops close to zero.

Errors, Omissions, Rounding: These kinds of mistakes can occur in many ways, the most common being paper filing. The IRS reports that 21% of returns filed on paper have errors, while less than 1% of electronic returns contain errors. Step one to avoid an audit is to file electronically.

Don’t omit any income. The IRS receives the same 1099 and W-2 forms that you do. If you lose one, contact the payer for another copy or exact numbers. Do not round numbers, either, or leave any blanks. If the amount is zero, put $0 or a dash in the space, otherwise it will look like you missed it. If the amount is $5996, do not write $6000.

Deductions: By all means, take all the deductions you can, but document them very carefully. If you cannot document, the safest approach is to not include the deduction. Common deductions that can trigger an audit: charitable donations out of proportion with your income; excessive business expenses, including home office deduction, bad debt, and business travel, meals, and entertainment expenses; casualty loss (fire, storm, etc.); and medical expenses. You may wish to include a note of explanation and provide additional documentation, for instance, cancelled checks, so that an agent reviewing your return will see there is good reason for the expense and not bother with the audit procedure.

Change of filing status: If you previously filed “married filing jointly” or “married filing separately” and suddenly change to “single” or “head of household,” the IRS will look more closely. Usually this signals a change of marital status that includes other taxable events, whether through divorce or through settling an estate. As with every other flag, be sure to have thorough documentation, including a note of explanation on the return, if necessary.

Line of work: Different employments are more closely scrutinized than others. Cash businesses (waitressing, bartending, hairdressing) as well as professionals who tend to keep their own books (doctors, lawyers, accountants) tend to be scrutinized closely.

The self-employed and small businesses are also more likely to get audited than corporations or LLCs. If possible, incorporate or create an LLC to reduce your likelihood of an audit.

Amendments: If you send in an amendment, your chances of audit are higher. Careful tax preparation the first time is key.

With regard to IRS audits, the best defense is a strong offense. Document everything, have a professional complete your taxes, and if you do get audited, take a professional with you to do most of the talking. We know the process and can help you navigate through it with minimal stress.

 

By | 2019-04-30T14:33:51-04:00 November 28th, 2018|Taxes|0 Comments

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