March 31, 2021
There are few things worse that receiving a notice in the mail of an impending IRS audit. People tend to associate this uncomfortable process with the IRS finding mistakes and assessing bills for hundreds of dollars in penalties and fees. However, it does not have to go that way. There are things you can do in order to avoid an audit, ensuring that you are much less likely to have that dreaded notice delivered to your mailbox.
How to Avoid an IRS Audit
Receiving a notice regarding an impending IRS audit of your finances and tax records can be intimidating. However, there are several different types of audits, some more complicated than others. The first kind is done via mail. The IRS will send you a letter stating what they need and include instructions as to how you can remit that paperwork. They will review everything and then send you another letter stating their findings once they are done. Though nerve-wracking, this is the most basic type of audit.
The next type of audit requires you to go to the IRS office in your city with your required information. You will need to bring all the documentation that they request. Again, the audit will take place, and you will receive a notice once the process is complete. Finally, the third type of audit involves an IRS agent appearing at your door to conduct the audit. They rarely conduct this type of audit without warning, so you will be notified ahead of time about this particular process. No matter which type of audit you may be selected for, it’s best to try to avoid having one altogether in the first place.
What Triggers Does the IRS Use for Audits?
There are some common things that can trigger an IRS audit. Knowing what they are can help you avoid them, and thus, make it less likely that you’ll be selected. Some of the most common triggers include:
- Sending in a Return That is Inaccurate – Double-checking your math and being as accurate and honest as possible with your income and deductions will make you less likely to be selected for an audit.
- Filing a Schedule C Form – People who are self-employed often file a Schedule C form with their returns. This makes them more likely to be selected for an IRS audit.
- Having a Business That Runs on Cash – Some businesses, like restaurants and bars, simply have more cash transactions than others. If your business deals primarily in cash, the IRS may decide to audit you.
- Including Bad Debt Expenses on Your Return – Certain deductions, like those for home office expenses, travel, and meal expenses, and even casualty losses increase your chances of being audited.
- Filing an Amended Return – While you do have the right to amend a tax return from any year, filing that new version of the document can trigger an audit of both the new return and the old one.
These are just a few examples of possible triggers that can alert the IRS of the need to proceed with an audit. Obviously, there are plenty of others as well. The main thing to focus on is submitting a transparent and accurate tax return that includes all of your income. As long as you have all of the documents to back up everything listed on the return, you should be fine should you receive an audit request.
Accounting for All of Your Income
When filing a tax return, it’s crucial that you report all of your income. Whether you have a side business that operates mainly in cash or a standard job as well as one as an independent contractor, netting you both a W2 and a 1099, you need to account for everything. Remember, if the IRS suspects that you are hiding or not reporting income that should be taxed, you are most likely to be selected for an audit.
Do not forget that the IRS can obtain both your bank and property records to see if you are living within your means. If they see large amounts of cash deposits and withdrawals, as well as expensive vehicles and homes that do not match the amounts that you account for on your returns, they will definitely suspect that you are hiding money. You need to accurately account for every dollar made on your return.
How Deductions Work
Tax deductions are included on returns sent to the IRS. They are a way of lowering your overall tax liability, and there are dozens of different categories that deductions fit into. The main problem is that some people tend to use too many of them in order to lower their overall tax liability. If you intend on filing for a deduction, make sure that you have all of the receipts and paperwork to back it up and avoid taking any that you are not eligible for. Otherwise, if you are audited, you could end up owing the IRS money and facing a plethora of penalties.
What About Your Investment Income?
Since people who earn a higher income are more likely to be selected for an IRS audit than lower earners, it makes sense that reporting investment income on a return could be a potential trigger. All of your eligible investment income ends up getting reported on a 1099 form that is sent to either you or your investment manager. It’s up to you to ensure that you gather all of those forms and report the amounts accurately on your tax return. You do not want to end up getting penalized by the IRS for incorrectly reporting that additional income.
Do You Deal Primarily in Cash?
It’s part of doing business – some people deal with cash exclusively. Restaurants and bars, as well as the people they employ, including waitresses, hostesses, and bartenders, often receive cash tips and payments, as do salons and stylists. This makes them more likely to be chosen by the IRS for an audit, simply because they may suspect that not all of that cash was accounted for on a tax return.
If this is the case and you simply can’t do away with accruing cash payments, then you need to be very careful when filing your tax return. Avoid all of the miscellaneous deduction options, if you can, because they increase your chances of being selected for an audit. In addition, keep accurate records of every cash transaction, and make sure that your general lifestyle and your income go hand in hand. For example, someone who shows very little income, yet has a vacation house and boat, might be seen as hiding money that should be reported to the IRS.
Getting Help with Your IRS Audit
If the IRS has notified you of an impending audit, it’s crucial that you seek the help of a tax professional. Working with someone who has plenty of years of experience in dealing with the IRS and helping people go through audits will make the process go much more smoothly. You are also more likely to obtain a fair resolution, should the IRS decide that you owe them money based on their audit findings.
It is crucial that you do not go through the process alone. Having a tax professional, who is familiar with the process, helping you through each step and assisting you with all communications with the IRS can prevent crucial errors.
If you have questions about getting audited by the IRS or have an impending audit forthcoming, please reach out to us. The tax advisors at Enterprise Consultants Group can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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