How to Avoid a Tax Audit
Tax audits are something that everyone wants to stay out of the radar of. This is why in this article we are going to discuss some of the top ways in which you can avoid a tax audit.
You Need to Understand the Selection Process of the IRS
To flag potential tax audits, the Internal Revenue Service aka IRS takes the help of an advanced computer program called the Discriminate Income Function (DIF) to flag potential audits. This helps the IRS compare one individual’s deductions in comparison to those of others in his or her income bracket. That being said, you needn’t get scared away by this if you have not been taking all the deductions in which you are entitled. You need to make sure that you have all the documentation ready to back them up with proper reasons and causes. Also, remember that some taxpayers really are selected through a luck of the draw mechanism. Therefore, there is no concrete way for you to protect yourself from a tax audit. However, you can still manage to lower your odds.
Find Out if You Are Being Targeted
It is highly likely you will be targeted for a tax audit by the IRS or the Internal Revenue Service if you happen to be in a cash-heavy business. This could include being a waitress, bartender, hairdresser, if you are a successful doctor, lawyer, or accountant. In this case, you will certainly need to be extra meticulous with your deductions. Make sure that you document everything. Also, stay away from miscellaneous deductions as much as you can.
If Self-employed, Try to Get Incorporated
Another high chance of getting audited is if you are currently filing a Schedule C as a self-employed taxpayer. So if you are self-employed then you should start considering incorporating or forming a limited liability company (LLC). This will give you a benefit as corporations and LLCs are much less likely to get audited. However, incorporating or forming an LLC also allows for more deductions so you need to keep this in mind.
Consider Including Your Explanations
If you feel like you have a greater chance of raising an audit flag then a pro hack could be to include extra forms, worksheets, receipts, etc. You can use them to explain your various inconsistencies from previous years’ returns in areas. That being said, the DIF system may still happen to flag you. When a human IRS agent takes a look at all your additional forms he or she might hopefully decide to not consider you for a tax audit.
Always Avoid Filing Amendments to Your Tax Return
If you are hoping to avoid a tax audit at all costs then you should probably consider flying below the radar of the IRS. Filing an amended return is something that will definitely defeat this purpose. Your original return may also happen to come under the IRS’s scrutiny with the filing of an amended return. Therefore, make sure to file everything correctly the first time.
This brings us to the end of our discussion on top ways to avoid a tax audit. Now, let us know some of your personal strategies of doing the same.
