12 Tips So You’re Less Likely to Fear an IRS Audit



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.

David Castillo DominiciSo 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.

Even Ordinary Folks Need 10 Best Strategies for Estate Planning — Updated March 27, 2015 It’s a mistake to think estate taxes only apply to the super rich. Estate taxes hurt ordinary folks. Estate taxes are especially problematic for farmers and small businesspeople, alike, who own their buildings and have capital tied up in equipment to grow crops or to produce products.

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.” 

-Laurie Anderson


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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.





Photo courtesy David Castillo Dominici at www.freedigitalphotos.net


Tax Tips for Your 2011 Year-End Tax Planning

November 9, 2011

If you haven’t completed your year-end tax planning, you might want to consider it now.  Just in time, come 12 pointers from Grant Thornton’s Washington national tax office.

“It’s not too late to change what goes on your tax return when tax season rolls around,” says Justin Ransome, a Grant Thornton partner in a press statement. “Just a little bit of planning in November can often go a long way on April 15.”

The professional services firm acknowledges that tax burdens for everyone are as challenging as ever, as policymakers are trying to maximize tax revenue to balance budgets.

Grant Thornton is quick to remind you to see your tax advisor for your own situation, but offers 12 tips that fit most anyone’s circumstances.

For brevity here, Grant Thornton’s excerpted list includes:

  1. Accelerate deductions and defer income. Why pay tax now when you can pay tomorrow? Deferring tax is a cornerstone of tax planning. Generally this means you want to accelerate deductions into the current year and defer income into next year. There are plenty of income items and expenses you may be able to control, and business owners and self-employed taxpayers often have the best opportunities.
  2. Bunch itemized deductions. Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI).
  3. Maximize “above-the-line” deductions. Above-the-line deductions are especially valuable because they reduce your AGI, and AGI is used to test whether you’re eligible for many tax benefits.
  4. onsider charitable contributions carefully. Think about giving appreciated property to charity so you can deduct the full value without paying capital gains taxes. But don’t donate depreciated property.
  5. Leverage retirement account tax savings. It’s not too late to maximize contributions to a retirement account. Traditional retirement accounts like 401(k)s and IRAs still offer some of the best tax savings in the tax code.
  6. Roll over into a Roth account. “Roth” versions of traditional retirement accounts, such as 401(k)s and IRAs, also provide a great savings opportunity. You don’t get a tax break when you put money into a Roth account, but the money grows tax-free and is never taxed again if distributions are made properly.
  7. Expense business investments. Business owners have been given a great opportunity to save on taxes while investing in their businesses this year. Legislation enacted in 2010 doubles a bonus depreciation tax benefit for property a business places in service before the end of the year.
  8. Consider your salary as corporate employee-shareholder. If you own a corporation and work in the business, you need to think carefully about your salary structure.
  9. Make up a tax shortfall with increased withholding. Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem.
  10. Don’t forget to use annual gift tax exclusion. If you may have to pay estate taxes eventually, consider establishing a gifting program for your children and grandchildren to take advantage of the annual gift tax exclusion.
  11. Watch out for the “kiddie tax.” The “kiddie tax,” which requires a portion of a child’s unearned income to be taxed at the parents’ marginal rate, has been expanded to apply to full-time students under the age of 24 whose earned income does not represent at least one-half of their support.
  12. Perform an overall financial checkup. The end of the year is always a good time to assess your current financial situation and your plans for yourself and your business. You should think about cash flow, health care, retirement, investment and estate planning.

“Keep in mind that these tax tips are general tax advice and may not be applicable to your particular circumstances,” warns Mr. Ransome. “Make sure that you consult with your personal tax adviser before implementing any changes or additions to your tax planning strategy.”

That’s excellent advice, too. For more details, I strongly urge you to read Grant Thornton’s 2011 year-end tax guide. 

From the Coach’s Corner, here are more financial tips:

Budgeting Basics for a Micro Business

In Any Economy, What Drives Your Profit, Really?

Embezzlement – Tips to Protect Your Nonprofit or Company Assets

Accounting / Finance – Why and How to Determine Your Break-Even Point

6 Values for Financial Protection

“We don’t seem to be able to check crime, so why not legalize it and then tax it out of business?
-Will Rogers

 

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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?

 

Seattle business consultant Terry Corbell provides high-performance management services and strategies.