This is a common question among many taxpayers.
The fact of the matter is there is really nothing that can be done to avoid being selected for an audit. However, there are a number of things that can be done to reduce the risk of being audited.
A few items that encourage an IRS Audit are as follows:
- Tax deductions that appear to be substantial compared to income.
- They may be legitimate but you will likely receive a request to provide proof of the deduction
- Large medical deductions could be the cause of a review as well
- All numbers are rounded off
- If all of your deductions end in zero (i.e., 100, 500, 300), it’s a good indication that there are no receipts to confirm the amount reported
- Indicates exaggerated figures or poor record keeping
- Repeated Schedule “ C” losses
- Schedule “C” losses 3 out of 5 years will generally be reviewed to determine if there is actually a legitimate business versus a hobby
- Schedule “C” losses reduce your overall tax liability as opposed to hobby income in which the expense is only deductible up to the amount of hobby income reported
- Large cash contributions
- Contributions that seem excessive when compared to income reported
- Request for documentation may be received. Note: “Cash contributions” should be paid via check as opposed to cash for proper documentation should you face an audit.
- An occupation in which cash are tips are normally received such as waiter, barber, hair stylist, etc.
- A review of these accounts would require documentation of cost of services rendered as well as amount of tips received.
- Unreported tips could cause an estimate of tips received and a re-calculation of the liability due
There are a number of “do it yourself” software programs available. However, with the number of changes to the tax law annually, I would suggest having an experienced tax preparer file your return. An experienced preparer will save you money in the long run – either with the reduced liability or the savings on the penalties due to returns filed in error.
Please take heed to the information shared in this blog post as a tool to help improve the way you handle your personal and business dealings; perhaps they will aid you in reducing the risk of being audited.
By Wanda Watson-Brown, Premier Business Solutions (www.premiersmallbusiness.com)
Please feel free to leave a comment. You can e-mail me at firstname.lastname@example.org.