Audits and Your Defense Against Them
Reduce Your Chance of Audit Here
Many of us hear the word “Audit” and shriek into the depths of misery. Let’s just ease your mind a little and help you know what you can do to reduce your chance of audit and having to deal with these clowns. (IRS Auditors that is.)
The IRS is no longer limited in how they audit you. Meaning, they can send you a notice saying you are under audit rather than coming to your door. Once you are under audit, they require you to send all your records of receipts, mileage logs, and any other applicable deductions you should have records for. If you own your own business, this increases your chances of being audited.
It may feel that the IRS is always out to get you. We agree with this, and we hear all the time how afraid our clients are of Uncle Sam. With proper guidance and an advocate, you should have nothing to worry about. Let’s look at some things you can do to be confident in your tax filings and situation.
- File Electronically– This method is recommended for many reasons. It is accurate with all the information, it is much faster, and you can quickly know that it was received. If it is not received, then the IRS might audit you to know why it wasn’t submitted even if you mailed it in.
- Updated Address– If the IRS isn’t able to find you because you moved, then in the process of sending refunds or notices they will have to look into your situation more intently. Fill out a change of address form if needed.
- Report All your Income- Trying to hide income from the IRS is like trying to hide a chew toy from your dog. The sniffer on that thing! They have resources to check where you received income and how much. Report accurately and if you are worried about the tax consequences for having a higher income level, see tip 9.
- Having a Neat Return- Some might think that the more information on a return, the less likely the IRS will look into the situation. The truth is, making a neat return makes the incompetent IRS worker’s jobs easier, (we like to give them baby steps so they don’t mess up inputting information.)
- Break Large Expenses into Smaller Portions- If someone at the IRS were to look at your tax return and see a utilities expense of 50,000, it may trigger an audit. Instead break this out into other categories. List your telephone, fax line, internet, and use utilities for its own expense to reduce the chance of audit.
- Keep Your Mouth Shut- the IRS will pay a commission to people to rat you out. You could even be filing everything properly, but if you get reported by some son of a gun, they will audit you. Keep your mouth shut with your buddies, ex-spouses, and people who might not like you. IRS Publication 733.
- Sch C Reporting Loss- Being self-employed and reporting to many deductions on your Sch C can look suspicious if there is a substantial loss. Some might want to start looking at claiming some personal deductions that may look doubtful to the IRS. Make sure what you are wanting to deduct is a business expense not personal. Again, if you are worried about tax strategy and reducing tax liability, see tip 9.
- Advice from Professionals- Make records of those professionals who have advised you on certain strategies. There are many instances where relying on a professionals advice has warranted a wave of penalty if something was done incorrectly per their advice.
- Accountant Who is Competent- Studies show that those who prepare their own tax returns will have more than twice as many errors on their tax return and will leave more of their money for the IRS, (Also mentioned in this recent post.) The IRS knows that you are not a professional and don’t understand all the rules and regulations, which could increase the chances for and audit. An accountant will also find you more tax deductions than you could, as it is their profession. Hence saving you more money, can reduce your chance of audit, and living your life out of the shadows with confidence. Sounds like the best strategy.
No one wants to go through this process of an audit, so follow these steps to reduce your chance of audit. Make sure you are keeping record of you expenses and categorizing them properly. If you have a question on how something should be categorized, call us. If you want further clarification on these tips, email us. We love helping those who are eager to stick it to the IRS! Reduce your chance of audit now by being smart with your business.