Worried about extra scrutiny from the Internal Revenue Service?
Everyone has heard horrible stories about people getting audited by the IRS and the IRS wasting a lot of their time for tiny mistakes or the IRS forcing the taxpayer to pay much more in taxes than they already paid. Statistics show that only about 1% of tax returns get audited in a given year, so if you think about it, it is more likely than not that you will get audited in your lifetime.
While you can never completely "audit-proof" your business's income tax return, you can take actions that will greatly reduce your chances of being flagged.
Here are 5 ways to avoid a tax audit:
1. Don't prepare your return by hand: Preparing your tax return by hand can easily lead to math errors or a return being too sloppy for the IRS computers to read. If the IRS computer doesn't understand what is on the return then an IRS employee will manually look at your return. Whenever you have an actual person looking at your return, the chances for an audit significantly jump. It is suggested that you use tax preparation software or use a tax professional to help you file (who most likely uses tax software as well).
2. Make over 100K a year: This is one of those things that you can't help, but it is good to know that once you pass this point your chances of an audit are significantly higher. If you do make over 100K a year, be sure to keep detailed records because the audit rate of 100K+ people is about double that of under 100K. This makes sense financially for the IRS to pursue these people because they pay more than 60% of the taxes in the United States.
3. Don't use foreign accounts: If the IRS sees money being transferred overseas or to some kind of foreign account this is a big red flag to them. Even if there is a legitimate reason for sending money overseas the IRS will investigate, so be sure to keep good records of any transactions that are being done.
4. Don't round your numbers: Rounded numbers is an instant flag to get a tax return looked into further. The IRS knows that the likelihood of you having deductions that are rounded off to the nearest thousand or hundred is extremely unlikely. The IRS knows that people that don't have exact records for their transactions just take guesstimates on some of the deductions or income numbers on their tax return. Be sure to use accurate information and avoid rounding.
5. Be careful with business deductions and schedule C filings: If you own a small business and file a schedule C, this will significantly increase your chances of an audit. Over the years people have abused many deductions, so the IRS keeps a close eye on this. One of the major things that they watch out for is the home office deduction. If you do have a legitimate home office, be sure to keep all proper records to legitimately backup your deductions. Also, if you do have a small business, consider setting it up as a different entity so expenses won't flow through your personal tax return. Partnerships and SCorps are most less likely to get audited and the IRS doesn't look into business expenses that are being flowed through these entities as much as personal tax returns.
An IRS audit is a big hassle for anyone who encounters one and can be costly. Keeping these things in mind can significantly decrease your chance of an audit.