Very few people look forward to paying and filing taxes each year. It’s not exactly a highlight of the spring. Yet we faithfully file our returns each year and move on with our lives. For most people, that’s it. You go on with your life until next tax season rolls around and the process repeats. But for a small fraction of taxpayers, the process drags on a bit longer in the form of an IRS tax audit.
What is an IRS Tax Audit?
An IRS audit is simply a review/examination of an individual’s or organization’s financial information to ensure that the numbers reported on the tax return are correct and consistent with the current tax laws. The IRS uses a few different methods for auditing and each one looks a bit different from the next.
“Sometimes returns are selected based solely on a statistical formula,” the IRS explains. “We compare your tax return against ‘norms’ for similar returns. We develop these ‘norms’ from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts.”
Other returns are audited when certain triggers or red flags are raised. For example, if it’s obvious that zeroes have been added or removed from a number, the IRS will want to look into the origins of the mistake or infidelity. In other cases, a tax return may be audited simply because it has a connection with someone else’s tax return who is also being audited.
If your account is selected for audit, you’ll be notified by mail. The IRS is very clear that they do not initiate audits by telephone, nor will they make threats or accusations in order to receive a payment. IRS audit scams and frauds are fairly common, so it’s important for people to be aware of the difference between a genuine inquiry and a malicious one.
6 Ways to Avoid an IRS Tax Audit
When you take the necessary precautions to file your tax return accurately and on time, your chances of being audited are extremely low. In fiscal year 2018, just 0.59 percent of all tax returns were audited. And if you make less than $500,000 per year, your chances of being audited are even lower.
Having said that, here are some additional steps you can take to avoid an IRS tax audit and rest easier at night:
- Double-Check Your Return
If you’re like most people, you aren’t actively engaging in activities that are designed to mislead the IRS. This means your biggest risk factor is making simple math mistakes on your return.
It seems like obvious advice, but make sure you double-check your tax return prior to signing and submitting. Even if you have a professional prepare your taxes on your behalf, it’s important to go back and review their work. This will prevent glaring mistakes from causing unnecessary audits and inquisitions.
In addition to reviewing numbers and making sure all figures are accurate, you should also verify things like social security numbers, names, and other basic information. These are easy items to check, yet they can save you a lot of trouble down the road.
2. Don’t Claim Anything You Can’t Support
Documentation is everything. If you’re going to claim a deduction, charitable donation, or tax credit, you absolutely must have paperwork to support your decision. If you can’t prove it on paper, you’re better off not claiming it at all.
If you do have documentation, be sure to keep it organized and filed away in a safe place. The IRS can come back and review tax returns from previous years – typically no more than six years – and it’s smart to be prepared ahead of time.
3. Never Under-Report
It’s tempting to under-report your income when you think you can get away with it. This is most common when cash payments are involved. After all, how can the IRS tell if you’ve reported cash?
“In some situations it can't. After all, the system isn't perfect. However, a common way some individuals get caught is that they accept cash for a service they've performed,” Glenn Curtis writes for Investopedia. “If the customer or individual who paid that individual the cash gets audited, the IRS will see a large cash disbursement from his or her bank account. The IRS agent will then follow that lead and ask the individual what that cash layout was for. Inevitably, the trail leads right back to the individual who failed to report that money as income.”
The best rule of thumb is to report everything. This prevents any unnecessary scrutiny and allows you to file with complete confidence.
4. Explain When Necessary
If there are circumstances surrounding your tax return that you believe could cause the IRS to raise eyebrows or dig deeper, be sure to provide an explanation.
There’s nothing preventing you from including receipts, worksheets, and extra forms alongside your return. You can also include statements in regards to any changes or inconsistencies that exist from the previous year’s tax return. This won’t necessarily prevent an audit, but it does show good faith and will make you a less likely target.
5. Consider Filing Later
While there’s nothing in the IRS handbook that says this is true, many tax advisors recommend filing as late as possible. The belief is that you’re less likely to have an audit if you file closer to the tax deadline. In fact, some suggest filing for an extension, which they believe dramatically reduces your chances of being flagged. (If you do file for an extension, be sure that you still pay your taxes by April 15, or else you’ll face penalties.)
6. Avoid Schedule C Losses
If you’re filing a Schedule C as part of your return, make sure it’s accurate. But it’s also wise to think about the Schedule C in terms of profits or losses. If you’re reporting hefty losses, the IRS will naturally scrutinize your numbers. (After all, this reduces your taxable income.) If you’re reporting losses in consecutive years, they’re even more likely to investigate. Keep this in mind and be very careful with the expenses you deduct. Again, you should be able to support everything with written documentation.
What to Do If You’re Audited
Regardless of how careful and precise you are, audits can still happen. Accounts are randomly pulled sometimes as a way of holding taxpayers accountable. If you find yourself in a situation where you’re being audited:
- Don’t ignore an IRS audit request. There are specific deadlines attached to audits and you could be fined or penalized for a failure to respond and/or supply the necessary documentation by the required date.
- After responding, take the time to get all of your files and records in order. The more organized you are, the easier this process will be on everyone.
- Stay calm.
- Don’t lose your cool or let your emotions get the best of you. Most audits are fairly straightforward. In most cases, the worst that happens is that you end up owing some more money.
Prepare Your Tax Return with Taxfyle
When filing taxes, it’s wise to remove as much guesswork from the process as possible. If you feel overwhelmed or uncertain, you’re much better off hiring a tax preparation professional to streamline the process and enhance accuracy.
At Taxfyle, it’s our aim to make tax preparation as simple and straightforward as possible. To learn more about our online tax filing services, contact us today!