A tax audit is a review of an organization’s or individual’s accounts and financial information to ensure tax information is reported correctly. Tax audits are typically done at random and only when it is suspected that there is a problem with a taxpayer’s return. This can be nerve-racking for individuals or companies to think about having a return audited by the IRS, but there is a small chance that this will happen if you follow these tips to avoid a tax audit:
Honesty is the best policy
Perhaps it’s common sense, but being 100% truthful on your tax return is an absolute must to reduce the chances of an audit. It is extremely important to be honest with your tax returns. Don’t omit any income in your tax report, no matter how small the amount. Report all of the income you’ve earned during the tax year, including any assets you sold. Make sure to be extra careful when editing transactions within your accounting software, as these can affect the income total reflected on your taxes.
Any gaps will attract the auditor’s attention, especially if you are self-employed. You should be able to account for any business claims like miles driven, meals, supplies, and entertainment costs with receipts or other relevant documentation. In general, you should be prepared to look an auditor in the eye and support any number you claimed on your return.
Proofread your tax return
A mistake on just one figure or item can present IRS audit flags and an audit risk. Taking just a few minutes to verify your entries is the number one way to avoid a tax audit. Print out a copy of your tax return and compare your entries with your source documents. Then check every item on your return, including social security numbers, addresses, and other personal information.
File taxes on time
A no-brainer, right? But if you fail to file your taxes on time, you automatically put an audit target on your back. Filing on time also ensures that you don’t have to pay the IRS late filing penalty. The Failure to File Penalty is 5% of the unpaid tax amount for each month (or portion of a month) that your return is late. It’s a heft penalty that can equal up to 25% of your unpaid taxes, so make sure to file on time, every time. Tax law demands you to file a return even if you owe no taxes or had no income in the tax year. The IRS may find and question you if you do not submit your tax return for whatever reason. File a return demonstrating and explaining the reasons for the zero taxes. You may request an extension if you need more time to collect the paperwork needed for your tax filing, but this request may be denied.
Check your figures
One of the most common red flags for auditors – erroneous data entry – is also one of the most preventable. It seems simple enough to follow the advice to “double-check your return,” but surprisingly, people are often too careless regarding their taxes.
In some cases, taxpayers make avoidable mistakes by forgetting about income or related forms they’ve received when filing.
- A good practice is to wait for all your income reports, bank and investment statements, and other applicable financial paperwork to arrive before starting your tax return.
- Correctly reporting dependents and exemptions, as well as ensuring that the numbers match, is also important. The IRS’s automated system will easily detect discrepancies, and it won’t be obvious whether or not a discrepancy is accidental or on purpose.
Unusual or unrealistic itemized deductions, either for individuals or small business owners, may raise a red flag for auditors. For example, claiming a charitable tax deduction for 40% of your total income could raise some eyebrows at the IRS. Also, if your home-office expense is out-sized, you might be questioned. Very round numbers are another kind of suspicion. For every gain on inventory, the IRS might want verification from the trade confirmation. Although some round numbers occur naturally, they may draw attention.
Hire an accountant
Hire a tax professional to file your taxes. Not only will this increase the chances that your tax return is correct, but you also stand a better chance of maximizing your tax deductions. When it comes to taxes, peace of mind is worth the cost. Free yourself to focus on the direction and performance of your business and let Hayes & Associates help with all the complexities of the financial details.
Our team possesses an in-depth knowledge of auditing and compliance issues facing federal, state, and local government, nonprofit, and commercial entities. Provide financial assurance to the public and meet the specific needs of third parties with help from our dedicated team. We identify areas where financial or operational controls need improvement and show you how to enhance internal processes for more cost-effective use of your resources. Contact our Audit Services Team to learn more about how we can help you thrive.