5 Ways To Prevent A Tax Audit
Some foolish actions can significantly raise the risk of an IRS audit and the very thought of receiving an audit letter from the IRS probably sends shivers down your spine. But by avoiding common mistakes and taking the right steps now, you can minimize your risk of an IRS audit down the road. Here are five ways you can prevent a tax audit and avoid common mistakes.
1. Enter Your Identifying Information Correctly
Although it sounds obvious, make sure you do the simple things correctly. Making a mistake while entering your Social Security number or misspelling your name can result in the IRS rejecting your return. If this happens, you will have to refile, which will delay how quickly you receive a refund.
2. Report All Income
If you make any money outside your regular job, you need to report the earnings on your tax return, said James Hreyck, a tax consultant with the Phelps Group who practices in New York. “If the person (or) company that is paying you reports the business, you would definitely be raising a red flag,” he said.
For example, if you do freelance photography for a company that reports your payment as a business expense, the IRS expects to see the same amount listed as income on your return.
3. Minimize Year-to-Year Differences
The IRS also identifies returns it intends to audit based on comparisons with your tax returns from previous years. “If there is a large differential of an amount from one year to another, it would increase your chances of being examined,” said Mike Smalley, an enrolled agent in Cleveland, Ohio.
For example, your risk of an IRS audit might rise if you claim $2,000 of mortgage interest in one year, and $25,000 of mortgage interest the next year.
4. Be Conservative With Deductions If You Earn a High Income
Simply making more money during the year increases your IRS audit risk, said Attorney Stephen Weisberg of The W Tax Group. “Tax returns that report more than $200,000 of income are audited more frequently than those below that threshold,” he said. He added that tax audit activity is even higher for returns reporting income in excess of $1 million.
5. Consult With a Qualified Tax Professional
The tax code can be difficult to read and understand. So, it’s often wise to consult with a tax professional. If you’re not sure if you qualify for a deduction, the money you save by avoiding an audit can more than cover your costs. And don’t try to take shortcuts by finding a cheap tax preparer just so you can save money. Some return preparers are actually scammers who will steal your refund or identity, the IRS has said. The most qualified of any tax professional is a tax attorney. Google them and make sure they are in good standing with the Better Business Bureau before retaining one.
No matter how many precautions you take, there’s no way to guarantee you won’t be selected for an audit. Use the tips above to lessen your chances, but also be sure to maintain thorough, organized records in case you’re chosen. If you have nothing to hide, the documentation to prove it, and strong legal representation, you shouldn’t have anything to worry about.
Lead Tax Attorney, The W Tax Group