You just woke up from a nightmare, the IRS is at your door with an audit. Good thing it’s not reality, but it doesn’t hurt to know some key tips to avoid getting that dreaded IRS notice.
Gather more insight into the tax system.
Knowledge is power, especially when it comes to money! The IRS uses a special computer program, the Discriminate Income Function (DIF), to compare your deductions with those in your income tax bracket. They compare your tax return against what is considered normal for similar returns and use that data to observe any discrepancies.
Have no fear; just have valid documentation handy to negate their questioning.
- Certain people are more likely to get audited than others.
You are exceptionally vulnerable in the eyes of the IRS if you are in a cash business: jobs like bartending, waitressing, hairdressing, and taxi driving. Employees who have expense accounts are usually busy being on the road or selling, thus require more advanced bookkeeping methods.
If you are self-employed, say so.
File a Schedule C form and consider becoming classified as an “incorporated” company (S Corporation). This allows for a company to carry losses forward, thus enabling it to lower the taxes for each year over which the losses are spread. Generally, becoming a company that is incorporated leads to smaller tax liability, especially when it comes to self-employment tax.
Another option is to form an LLC: Limited Liability Company. The benefit of doing so is that owners have limited liability for the debts and actions of the LLC. These types of companies are more protected against audits.
Include extra receipts, documents, and forms if you suspect that you could get audited. Use them to explain discrepancies in areas such as your name, your dependents, deduction amounts, and income.
Unreported income is perhaps the easiest-to-avoid red flag.
Be very aware of what is often questioned.
Debt expenses, home office deductions, medical expenses, meals & entertainment expenses, business travel, and casualty losses are red flags for the IRS. The best way to avoid this audit is being honest about how much was spent and only exclusively used for business purposes.
Avoid filing amendments to your return.
Filing an amended return will make you a bull’s eye to the IRS. Do your best to file correctly the first time.
Be aware that even filing an amended and fully accurate return will not immunize you if your initial return was filed fraudulently. Getting some professional advice about your errors can make sense here.
Try to file on Time, all the Time.
A good rule of thumb when it comes to timing, is filing timely is better. Since statistics show that the majority of people who file an extension or file late, hide income or overstate their expenses, it’s best to file on time. If you file late, you risk tax auditors scoping out your file extra meticulously.
Check your math and be exact.
Use a calculator and double-check everything just in case. Be especially careful to look over your forms and make sure the numbers are consistent with what you are submitting to the IRS.
Pay special attention to deductions that have adjusted gross income limitations such as medical expenses.
Leave nothing blank.
The reason for an audit may simply be an empty space. Answer every question and fill in every line, even if it’s simple with a dash or zero.
It might be a good idea to file electronically, according to the data reported by the IRS. The rate of error on a paper return is 21% while being the rate of returns filed electronically is 0.5%.