November 29, 2016
How to Avoid an IRS Audit
As the end of the year draws near, it’s time to plan for filing this year’s taxes. While the chance of being audited is slim, no one wants to invite scrutiny from the IRS. Roughly 0.84% of 2015 tax returns were audited, but that percentage still translates to well over one million people receiving an audit. Learning what raises red flags to the IRS helps avoid being audited.
Prepare your return honestly and accurately. Honesty is always the best policy when filing your tax return. Of course, many discrepancies are simply due to human error. Double-check your math, as well as your eligibility for every credit and deduction.
Be cautious with deductions. You should take every deduction you’re entitled to, but if you are unsure, be cautious. It is better to be safe than sorry, so take the time to research whether you are qualified to deduct certain expenses. Certain deductions are more likely to trigger audits, such as business and medical expenses, and capital losses. Likewise, charitable deductions that are too high in proportion to income raise a red flag.
Keep meticulous records. The majority of IRS audits are known as “correspondence audits,” and involve requests for more information. Many times, these audits require documentation to verify small business records, support claims for deductions, and investigate the income and losses reported by people who are self-employed, earn cash tips (such as wait staff and hairdressers), or do their own bookkeeping.
Opt to e-file. The IRS estimates that the error rate in paper returns is as much as 21%. That rate shrinks to as little as 0.5% for e-filers. Tax preparation software can go a long way towards checking eligibility requirements for deductions, adding and subtracting figures, and double-checking the math.
There are several more types of deductions, claims, and scenarios that can trigger an IRS audit. Read about them here.
Most audits fall outside of the average household’s tax return, because fraud is more likely to occur with the deductions and credits associated with either wealthy or lower income returns. However, red flags can occur on any tax return. Likewise, it is always possible to be selected at random for an IRS audit. As long as you fill out your return honestly, check for errors, report all taxable income, verify your eligibility for deductions, and keep the proper documentation, even being randomly selected for IRS audit doesn’t have to be a daunting experience.
Tax & Business Consultants, located in Blair, Nebraska, has been proudly serving our clients since 1960. Serving clients in over 35 states, we provide tax planning and preparation, bookkeeping, accounting, payroll, and consulting to small businesses. Please visit our website to learn more, or call (402) 426-4144.
Can your Business Benefit from the Enhanced Employee Retention Tax Credit?
COVID-19 has shut down many businesses, causing widespread furloughs and layoffs. Fortunately, employers that keep workers on their payrolls are eligible for a...
Educate Yourself about the Revised Tax Benefits for Higher Education
Attending college is one of the biggest investments that parents and students ever make. If you or your child (or grandchild) attends (or plans to attend) an institution of higher...
New Law Doubles Business Meal Deductions and Makes Favorable PPP Loan Changes
The COVID-19 relief bill, signed into law on December 27, 2020, provides a further response from the federal government to the pandemic. It also contains numerous tax breaks...