The key to dealing with an IRS audit is to have done your homework. If you do all your homework, you don’t have to fear an audit.
Chances are you aren’t going to be audited. Only about 1 percent of tax returns are audited, according to published reports.
However, if you are contacted by the IRS regarding an audit, in many cases it’s just a simple request for documentation.
Yes, it’s true even bonafide deductions can spark an audit. Even if you’re selected for a field audit, relax. You have nothing to fear if you correctly file your return.
So you need to adhere to the basics starting with accuracy and documentation.
Tips to reduce your audit risk:
1. Honesty matters most in reporting income
If you fail to report all your income, it’s the surest way to face an audit. So whether you get a W-2 or 1099 report everything.
As you probably know, the IRS gets copies of these forms. But always double-check the figures. In my very first on-air radio job as a 20-year-old, I learned a valuable lesson.
The station sent me a form indicating what it allegedly paid me, which I questioned. I had to threaten the company with legal action before it did the right thing.
That also means if you have a full-time job but take on a second moonlighting job where you didn’t get a W-2 or 1099, it’s easy to forget. So make note of the extra income and report it.
Additionally, don’t exaggerate or misstate your numbers.
2. Double-check all your numbers
If you report numbers with mathematical or typographical errors, the IRS will notice. Even with software programs, it’s easy to make typos.
3. Heavily, heavily document write-offs
Even if not required on small deductions, organize all your documentation for your donations. You aren’t required to report, for example, property donation of less than $250. But heavily document anyway.
The odds increase for an audit if you make a donation in five figures, it’s true that it’s OK to write it off. But document it.
4. Watch the EITC
If you’re low-income and claim the EITC, the earned income tax credit, you’re more likely to be audited than people who earn more money. Tax filers with no adjusted gross income are scrutinized because of fraud prevalent with those claiming the EITC.
Why? The IRS says about one-quarter of EITC payments is fake.
5. Due diligence in vehicle write-offs
Of course, you already realize you can write off business use of your car or truck. But if you only have one vehicle, the IRS will take a dim view if you try to deduct 100 percent business usage.
It’s impossible for you to use your only car for 100 percent business.
So keep mileage records of your trips for client meetings and other business activities.
6. Avoid filing amended returns
You have the right to file amended returns, if you fail to report credits or write-offs. You also minimize audits by getting your return right the first time.
It’s best to avoid filing amended returns. If you forget to include small deductions, it may not justify the risk from filing amended returns.
If you avoid an audit when you initially file your return, why risk an audit with an amended return? Why not let it go?
7. Pluses and minuses for electronic filing
The IRS prefers you file electronically. Indeed, most taxpayers do.
Statistically, published reports indicate electronic filings contain far fewer errors than paper returns, but that’s why paper returns increase your odds for an audit.
Senior citizens, especially, file paper returns. But they tend to avoid electronic identify theft.
8. If you’re self-employed, be careful about Schedule C losses
It’s common for startups to report losses. But if you’re not a new business and show profits in three out of five previous and start reporting losses, the IRS is inclined to consider your business as a hobby.
If so, you’re likely to lose your net loss in your original filing. This means you’ll be liable for taxes, interest and penalties.
9. Be careful if you work at home
The home-office deduction is only applicable for space you devote 100 percent to your business. Your family room where you watch television won’t fly with the IRS.
10. Be sure to only claim ordinary business expenses
The IRS will be comparing your expenses with other businesses. They must be considered ordinary and necessary.
A hint: You must be able to affirmatively answer this question: “For me to do my work, is this product or service necessary?”
11. Perfect numbers look suspicious
If your documentation is faulty and your business deductions are in round numbers, you’re likely to get more scrutiny.
The IRS knows round numbers are not common.
12. Make charitable donations proportionate to your income
You’re like to draw an audit if you claim a significant proportion of your income as charitable donations. Whatever you contribute, keep your receipts handy.
From the Coach’s Corner, related tips:
Tips on Understanding the Mindset of IRS Auditors — An IRS audit is enough to make you tense with cold sweat in the palms of your hands. More businesspeople have complained to me about the mean-spirited treatment at the hands of IRS agents than any other federal agency.
Keys to Protect Yourself from Skyrocketing Trend – Tax Identity Theft – Tax identity theft is increasingly victimizing Americans, according to the Internal Revenue Service. As many as 1.5 million Americans were hit by tax-refund fraud in 2013, according to IRS Special Agent Kenneth Hines in a 2014 published report.
11 Payroll and Tax Tips for Small Businesses — To stay competitive in this difficult marketplace, it’s vital to be proactive on your taxes.
Tax Deductions for Small-Residential Property Landlords — As investments go, small residential property landlords enjoy the most tax benefits. In a down year, rental property tax deductions can make a big difference whether you enjoy profits or suffer losses.
“I’ve never really had a hobby, unless you count art, which the IRS once told me I had to declare as a hobby since I hadn’t made money with it.”