The biggest dilemma for a small or mid size business owner is the IRS Audit.
Its one thing that taxpayers keep dreading about. So, how would you avoid it?
Here are ten different ways to avoid receiving an audit from the Internal Revenue Service (IRS).
1) Understand the Selection Process
The process may seem rather random, actually. To flag potential tax audits, the Internal Revenue Service uses the Discriminate Income Function (DIF). DIF is a computer program that compares your deductions with those of others in your income bracket.
Don’t let this scare you into not taking all the deductions you’re entitled to—just be sure to have documentation to back them up.
Remember, though, that some taxpayers really are selected through the luck of the draw, so you can’t completely protect yourself from being audited, but you can lower your odds with some further measures.
2) Stop Spending on Entertainment Events
Sometimes, you wish to organize meetings with your somewhere in a ball or other entertainment related place. That might improve your strategies to get your client interested in your business, but you have to do it with your own money.
In the US, according to the tax cuts and act jobs of 2017, if you try to skirt the system to keep your annual customer appreciation night, you’re raising a big red flag to the IRS to send an auditor your way.
However, you can still go to a restaurant with the company’s dime and not get into issues due to that.
3) Involve Explanations About Returns
If you think your return has a good chance of raising an audit flag, you should include extra forms, worksheets, receipts, etc. Use them to explain inconsistencies from previous years’ returns in areas such as your name, your dependents, deduction amounts, and income.
For example, if your charitable deduction is significantly higher than in previous years, include an explanation as to why—even copies of canceled checks. The DIF system may still flag you, but a human IRS agent can look at all your additional forms and hopefully decide that your deductions are well-documented and not deserving of an audit.
4) Avoid Filing Amended Returns
Flying below the radar is your goal here, and filing an amended return won’t accomplish that. With the filing of an amended return, your original return may also come under scrutiny, so do your best to file correctly the first time.
Also, according to the IRS,“Filing an amended return does not affect the selection process of the original return. However, amended returns also go through a screening process and the amended return may be selected for audit.”
5) Know The Correct Time To File
Most tax advisors say the later you file, the less likely your chances of an audit. Some go one step further and say you should even file for extensions as most returns are already selected for auditing in a given tax year by the latest extension deadline of October 15th.
Remember, though, that if you owe taxes, you are still expected to pay by April 15th or face penalties. Even if you’re not sure of the amount you’ll owe or if you don’t have the money to pay, send along a check for a small amount, even $10, with your promptly-filed return to show good faith on your part and lower future tax penalties.
On the other hand, if you’re expecting a hefty refund and don’t anticipate any audit problems, file as soon as possible so you can get your money quickly.
6) Check Your Calculations
Even if you’re a mathematician, use a calculator and double-check everything. Be especially careful that your numbers match those on forms submitted to the IRS by employers as the computer simply matches them up and looks for discrepancies.
Also pay special attention to deductions that have adjusted gross income limitations such as the medical expenses deduction; you probably won’t be audited for a simple mathematical error, but you don’t want to alert the IRS that you’ve carelessly prepared your return.
7) Fill All The Details
It’s often said that the devil is in the details, and for the IRS, the reason for an audit may simply be an empty space. Answer every question and fill in every line, even if it’s simply with a dash or zero. Don’t leave room for the IRS to assume anything.
No matter how many precautions you take, there’s no way to guarantee you won’t be selected for an audit. Use the tips above to lessen your chances, but also be sure to maintain thorough, organized records in case you’re chosen. If you have nothing to hide and the documentation to prove it, you don’t have anything to worry about—if you’re chosen, the audit will be a breeze.
8) Do Not Under-Report an Income
Tempting as it might be to exclude income from your tax return, it is vital that you report all money that you received throughout the year from work and from the sale of an asset to the IRS.
As simple as it is, if you fail to report income and get caught, you will be forced to pay back-taxes plus penalties and interest.
In some situations, IRS can’t deduce if you filed everything correctly. However, a common way some individuals get caught is that they accept cash for a service they’ve performed. If the customer or individual who paid that individual the cash gets audited, the IRS will see a large cash funding from his or her bank account.
The IRS agent will then follow that lead and ask the individual what that cash layout was for. Inevitably, the trail leads right back to the individual who failed to report that money as income.
In short, it’s better to be safe than sorry. Make sure you report all of your income.
