Tax time is tough enough without having an audit to deal with after you submit your return. Yet, the truth is that you can never safeguard yourself against an audit entirely. That is true whether it’s a business or an individual return.
However, there are precautions that you can implement to put your best foot forward with the IRS. You can minimize the chances of a tax audit. Some of these tips are just common sense. Others may not have crossed your mind as readily. Though, they are important all the same to help reduce the likelihood of being singled out after you file.
We’re going to take a look at six of the most useful steps you can take to avoid attracting attention. They will lower your chances of that dreaded audit.
1. Report Properly
Very few of us love doing our taxes. Forget about the part where you end up having to pay a sizable tax bill after all is said and done. We’re talking about the often mind-numbing minutia of gathering receipts, filling out forms, and adding schedules, figuring out your finances after marriage. Not to mention, compiling all of the accompanying paperwork that comes with the more complex returns for business filing.
You know what they say, anything worth doing, is worth doing right. In this case, particularly, it’s worth doing right so you don’t get a letter from the IRS saying that you’re about to be audited. That means you have a lot of I’s to dot and T’s to cross. Thus, you want to make sure that you’re doing everything you can to submit the most accurate tax return.
That starts with ensuring that every question on your return is answered in full. Plus, all of the required documents are properly filled out and submitted with your return. Make sure every applicable form and schedule is included. If anything is missing or improperly filled out that could raise a red flag. Be sure to submit any explanations or addendums. Describe why you may have omitted something or information has been entered into your form that isn’t readily understandable at first glance.
Speaking of paperwork and accompanying documents, be sure you have all of those items required. Make certain that they coincide exactly with what you are reporting. That means ensuring that the information on your Form 1040 corresponds correctly with all of your Form W-2s. Your employer submitted them to the IRS, Social Security Administration, and State and Local tax agencies. Any discrepancies will almost immediately be noticed. Then, you will be contacted to iron out the problem.
Of course, and this one goes without saying, be sure you report all of your income for the filing year. The IRS already has paperwork telling them what you made each year in the W-2s and 1099s that you were issued to fill out your return. The agency has automated protocols in place. They run comparisons between the information submitted on your return. The information it in a database that reflects what is declared on your W-2 or 1099.
When the computer notices that something doesn’t match, your return is flagged for an audit. That doesn’t necessarily mean you’re going be subject to a full accounting of your finances and how they match your return. Typically, you will receive a letter from the IRS first.
That correspondence will alert you to the discrepancy found. You’ll be asked to clarify. All you need to do is respond to the letter. Provide an explanation as to why you believe you filed correctly. If you made an error simply tell them you did indeed make a mistake and you can pay what is owed.
That usually satisfies the matter. However, let’s say the IRS disagrees with your explanation as to why you feel you filed the correct information and paid (or didn’t pay) what they believe is owed. Then, you can be sure you’ll be facing a full audit.
Check and double-check everything on your return. That means going over your math one last time to ensure you’ve carried all the 1’s and put the decimal point in the right place in your calculations. These issues are typically minimized if not eliminated entirely through electronic filing and the various tax software programs that currently exist. These methods do the calculating for you. All you need to do is enter the numbers where they belong. Make sure you’re entering the right numbers in the correct order and you should be fine.
Details are important since math errors or incorrect Social Security numbers can get your return flagged for an audit. Then it’s up to you to explain the mistake. That’s a hassle no one wants to deal with after all of that work was done to prep the return in the first place. Doing it right the first time gets it over with much quicker.
Finally, submit your return on time. Everyone knows that Tax Day is April 15th just about every year — that is, unless that date falls on a weekend. In that case, you typically have until that Monday to file. If you aren’t ready for whatever reason, you can file for an extension. However, be sure to get all of the necessary paperwork in when it’s due. If you are granted an extension, make sure you meet that deadline. It will help keep you from getting audited.
This is a critical step in avoiding an audit. There have been recent studies. They indicate more than half of the individual taxpayers in this country and even more businesses are turning to professional tax preparers. They assistant you in completing and filing your tax return.
This year will likely be no different. There are so many different types of tax professionals out there. Thus, it is absolutely imperative that you not only select the right kind of preparer, but a scrupulous and legal one.
There has been a growing trend for the American people and business owners to turn to professional help. Therefore, tax preparers have come under greater scrutiny by the IRS. Unfortunately, there is a demand for individuals seeking payment for their services. It leaves open the door for possible fraudulent practices on the part of shady operators and swindlers looking to prey upon unsuspecting victims out to make a quick buck.
The IRS warns taxpayers to fully vet their tax preparer before deciding to work with that individual. There are so many factors to consider when you’re hiring someone for help. You trust them with all of your private, sensitive personal and financial information. When all is said and done, and your return is handed into the IRS you are the one who is legally responsible for what it says.
That means if there are too many exemptions taken or deductions that you weren’t allowed to claim, the IRS is going to come down hard on you, not the preparer. Telling the agency that you had an unscrupulous tax preparer do the work is not going to suffice as a defense.
You will be audited in full and, pretty much find yourself back at square one if the return is really incorrect. That could result in you having to pay large sums of money in taxes and penalties. Not to mention the money you’ve lost by paying a dishonest tax preparer. They certainly won’t be around to clean up the mess afterward.
This isn’t to suggest that tax preparers don’t make honest mistakes, an incorrect calculation or two isn’t an explicit indicator of fraud. The IRS has made it clear that they are finding small mistakes on more returns filed by tax preparers. It’s a growing industry that still has little in the way of oversight or regulation.
That’s why it’s so important to hire the right person for the job. Though, doing that is going to require a better understanding of the different types of tax preparers that you can choose from. It’s true that they’re not all the same. Certain tax professionals are required to meet specific educational standards in order to be qualified for doing business as that type of tax professional.
Knowing which type of tax preparer can best meet your particular tax filing needs is going to make all the difference. It’s also crucial that you do your proper due diligence on that individual. Make sure they are in compliance with all current laws and mandates set forth by the IRS.
The Various Tax Professionals
When you are seeking out tax help, these are the types of preparers that you can choose from to get your taxes filed correctly:
Certified Public Accountant (CPA)
This is the tax professional most taxpayers hire to help them complete and file their return. CPA’s are bound by law to pass a state qualifying examination. They must become licensed before they can start offering their services to the general public.
These accountants are permitted to represent you in front of an IRS board if you’re hit with an audit or another lawsuit that determines you owe back taxes or penalties. Keep in mind that not all CPA’s prepare individual returns. Some of them only deal with businesses. Be sure to discuss what services are provided before you retain that preparer.
A tax attorney is an individual who works to solve tax disputes that are in violation of tax laws and codes that have been set forth by the IRS. This is the primary reason why choosing a tax attorney is often better than going with a standard CPA.
That’s because these types of professionals can be of assistance in figuring out complex legal matters when you owe money. They can also provide financial planning advice when you ask how much money do you need to retire early. Tax attorneys help you find the right shelters to protect your income for that very reason, legally of course.
These types of tax professionals can be invaluable when you’re taking on the IRS. They will have the most relevant information on how the agency operates. Enrolled agents are required to pass stringent exams that prove their knowledge in federal tax planning and tax return preparation. Every agent must also go through 72 hours of continuing education courses every three years.
Filing Season Program Professional
Any individuals who are not one of the three types of professionals above may volunteer to participate in the IRS tax preparer program. They have to complete 18 hours of continuing education classes over the course of the tax year they plan to enroll. They must pass a six-hour class and exam on all of the current federal tax codes. Unfortunately, these tax professionals are not allowed to represent you before the IRS during an audit or other matter.
Preparer Tax Identification Number (PTIN) Holder
There are also tax professionals who can’t really be grouped into any of these previous categories. However, they do have a PTIN with the IRS. They may not maintain a professional license or participate in the IRS Filing Season program.
Though, they may still be very helpful in getting your tax return prepared and filed. They are not considered a CPA or tax attorney. Nonetheless, these individuals are expected to have the proper knowledge for preparing and submitting a tax return. They must do so in order to offer their services to the general public.
Doing Your Research
Now that you know which tax professional is best for your particular situation, finding the right one is going to require some due diligence. First and foremost, your tax preparer MUST have a valid a Preparer Tax Identification Number. Otherwise, they can’t provide professional services for the purpose of preparing a federal tax return on a compensatory basis.
Checking for your preparer’s PTIN will ensure that they are operating legally. Consequently, any tax professional that cannot provide a valid number is your first indication this may be a fraudulent and dishonest individual. Make sure the number you’ve been given is indeed a valid PTIN. This can be done by looking it up on the Internal Revenue Service’s Directory of Federal Tax Return Preparers.
A background check is also a smart idea. It will ensure that your tax preparer hasn’t been the subject of lawsuits or other disciplinary actions. All of their applicable, appropriate licensing credentials need to be up to date.
Depending on the type of preparer you’ve chosen there are databases available to look into their background. Certified Public Accountants can typically be found on the National Association of State Boards of Accountancy. The State Bar Association will be able to give you all the pertinent information on tax attorneys and enrolled agents can be verified by contacting the IRS.
Things like deductions and credits can be great ways to lower your amount of taxable income or reduce your tax bill entirely, dollar for dollar. Credits are usually tougher to come by. You need to meet a lot of specific criteria in order to receive them. On the other hand, deductions are more commonly used by taxpayers. They help save a little money on what’s owed. If there are enough of them to claim, you get some form of a refund.
Nevertheless, be careful about claiming too many or you could be subject to an audit. The number of deductions you take is important. Though, the reasons for those deductions can also put you in the cross-hairs of the IRS. For example, let’s say you start to claim business deductions that don’t have much to do with your business or that seem excessive in the eyes of the IRS. This can put you at risk for getting audited.
Some taxpayers will opt for taking the standard deduction, which can be up to $6,300 for many individuals filing single. It’s a way of avoiding the lengthy process of itemizing your deductions and providing receipts or other paperwork to prove you are entitled to them.
Taking the standard deduction typically won’t put you at risk for an audit. However, let’s say you can rightfully claim more than the standard and have the ability to thoroughly itemize it all. Then, you should do so, by all means. Be sure your proof will stand up to scrutiny should you face an audit.
It’s important to mention that just because you itemize doesn’t mean you will be subject to an audit. That won’t put you under undue scrutiny. However, the deductions you list could get you some additional unwanted attention.
As long as you meet the qualifications for taking every one of those deductions, you should be okay. Consequently, if you claim all kinds of wild deductions that can’t be proved or doesn’t meet the criteria for your situation, you could be facing an audit.
4. Choose Your Forms and Schedules Carefully
The IRS is always looking for evidence that a taxpayer is trying to pull a fast one. One of the ways they try to delineate the truth from the falsehoods is by checking out the types of forms and schedules submitted with taxpayer returns.
The IRS checks to make sure your deductions are accurate through their deduction to income ratios. They also investigate to see if those deductions are legitimate. It’s based on your reported income and business operations, especially on a business tax return.
In some cases, business owners will file certain forms that can be a red flag to the agency. Take the Form 5213, for example. This prevents the IRS from auditing your business during the first five years of operation.
This can give your business ample time to show a profit and explain losses that your business might suffer during that time. However, if you claim a lot of deductions that the IRS finds suspicious over that period of time, you are almost guaranteed an audit after those five years have expired.
5. The IRS is Watching
In this age of technology and social media, we have all become a little more forthcoming about our personal lives and business dealings. Some may say it’s compromised our overall privacy in a world where such a thing is getting harder to come by. As it turns out, it can also contribute to an IRS decision as to whether or not you could get audited.
The IRS will typically check public records with the DMV or employment documents. They do so to check on the residence or employment status of a taxpayer whom they suspect may be trying to avoid paying their fair share. Now they have other valuable tools at their disposal such as Facebook and Twitter. The IRS is utilizing these social media hubs to locate taxpayers. They use them to verify whether taxpayers are living the high life online while pleading poverty on their return.
Your Facebook profile isn’t the primary determining factor in the decision to conduct an audit. The IRS is relying on social media more often than before. It helps them gather the necessary information to put toward making that decision with a stronger foundation of proof. Business websites are also a trusted source for IRS agents to observe. There they can explore the necessary details that may result in your business facing an audit as well.
6. Be Ready for an Audit
You may take every precaution possible and still find yourself facing an audit. It may be through no fault of your own either. That is because the IRS often conducts random audits, particularly for businesses and corporations. The truth is any return is subject to an audit either for cause or through randomization.
No need to panic. Be prepared should it happen to you. That means having all of your necessary paperwork in order. Keep clean records, organized receipts, and retain all paperwork from the previous three years of returns. That is the standard in most cases. It can even become six years if more income is missing from a return. An audit can go on for as long as the IRS requires in situations where outright fraud is evident.
Our Final Thoughts
Getting your taxes done shouldn’t come with the IRS breathing down your neck and double-checking all of your work. Follow these easy steps to reduce the likelihood of coming under scrutiny and you should be okay.
In the event that you are the subject of an IRS audit, following these steps will prepare your business to prove your case in full. Thus, you will come out on top in the end.