Every year, the Internal Revenue Service audits about one percent of the taxpayers in the US. From this percentage, some of the audits are random, while other taxpayers are targeted since they show inconsistencies in their tax returns. If you don’t want to be part of this last group, follow these ten tips to avoid an IRS audit.
10 Tips to Avoid an IRS Audit
Tip #1: Keep all your receipts
Keep all your expenses and profits receipts organized. If you keep your receipts, you’ll be able to submit a complete tax return with precise figures, thus decreasing the chances for an IRS audit.
Tip #2: Submit your tax return
If you don’t do so, you’ll be audited. It’s that simple. Even if you are starting your business and you still don’t have any profits, you have to do your taxes. If the government doesn’t hear from you, they may think you are a tax evader.
Tip #3: Avoid the “sole proprietorship” category
Small businesses can get significative tax exemptions. However, businesses under the sole proprietorship category have more chances to get an audit. Avoid this category and, if you can, fill in your taxes as a society or corporation.
Tip #4: Don’t round your figures
Round figures call the IRS attention. In most cases, it’s not possible for you to spend exactly $200, $500 or $700 in products and services for your business. Add up every cent to the figures reflected in your taxes to avoid an IRD audit.
Tip #5: Do your math
Simple math mistakes can open your business door to the IRS. When you fill in your tax report, make sure the total value of your profits or losses is right. Even the smallest error can look suspicious.
Tip #6: Don’t forget to sign your tax return
If you forget to sign your tax return, chances are the IRS checks it again -and more exhaustively, looking for further omissions.
Tip #7: Don’t report less income
You must report all of your business benefits for the year. If you omit any type of income in your tax report and the IRS notices, you’ll have to pay the outstanding balance plus interest (same way as in a fine).
Tip #8: Back up the deductions
The IRS knows the amount of income and expenses that are normal for each type of business. Higher expenses than the average, or suspiciously low income, are indicators that tell the IRS something’s not right on your tax return. If you have legit reasons for unusual figures, make sure you have the documentation to back them up.
Likewise, the IRS checks thoroughly the travel and entertainment expenses: you’ll need all your receipts and other evidence to prove that traveling is vital for the good health of your business.
Tip #9: Verify all Social Security numbers
Make sure you write all the Social Security numbers correctly. If you declare someone as a dependant, with the wrong Social Security number, it could alert the IRS.
Tip #10: Be meticulous from the beginning to the end
Prepare your tax return thoroughly. Keep your receipts and report every source of income. The process can be overwhelming; don’t hesitate to use a financial management software, or hire an expert to help you gather documentation and fill in forms. And, once you think everything is ready, double-check one more time for errors.
IRS audits are, and always will be, part of the tax collection process. The key to avoiding an audit is to be able to support your income and deductions. To sum up, just be honest!
Use the comments section to tell us about your good tax practices or to recommend us other strategies to avoid an IRS audit.