Nobody Wants To Get Audited
statistically you are unlikely to be audited since the IRS audits less than 1% of all tax returns. But don’t let that statistic make you feel bullet proof. There are definitely some things you can do to make it even less likely you are one of the taxpayers pulled for an audit. Keep in mind, that a portion of audits are drawn randomly from the IRS system for statistical purposes, and there is nothing you can do about luck of the draw. Beyond that scenario, however, here are some steps you can take to make it less likely you are on of the less than 1% this tax season:
Doing so will make it much more likely that you file a COMPLETE and ORGANIZED TAX RETURN, which definitely puts you in better shape when scrutinized for a potential audit by the IRS. Mathematical errors could red flag your return, and paying the relatively small amount necessary to have your return professionally prepared will be worth every penny if it helps you avoid being on the receiving end of an audit notice. Also, many tax preparers and CPAs are happy to assist you in the event a return he or she prepared is audited, so that is another reason to hire a professional. Remember, you get what you pay for in this world.
I know, it’s hard in this fast paced life to commit to what seems like anything tedious. But good record keeping does not have to necessarily be a tedious process IF you put a system in place and do it throughout the year. With smartphones, apps, and bookkeeping software, you can take steps to help you keep up with those receipts that could make all the difference for you. Now, ideally, you would only need those records in the event of an audit and we are talking about steps to prevent an audit here, right. Well, check out this scenario:
One thing that may redflag your return is if you give a really high amount to charity in proportion to your income (i.e. you make $50,000.00 a year, and gave $15,000.00 to charity this year). You don’t want to leave off the deduction just because it is a potential redflag if you legitimately made those charitable gifts. So, you could consider attaching a list of each charity by name to your return, along with an explanation and perhaps even the applicable receipts to your return to verify the deduction at filing. In the event your return did get pulled for review, if nothing else catches the IRS’s attention, it is unlikely they would bother to proceed with an audit in such a case.
You know what they say, “An ounce of prevention is worth a pound of cure.” So be smart and keep up with those receipts along the way and that way you will have them if you need them one day. Typically, the IRS statute of limitations for audits is 3 years, but for substantial omissions of gross income (exceeding 25%) or where fraud is alleged, the practical limit is 6 years. So, keep those records for a while just in case.
MAKE SURE YOUR FEDERAL AND STATE RETURNS ARE CONSISTENT WITH ONE ANOTHER. Discrepancies will most likely be caught by either the IRS or State Tax Commission, so get it right
Usually, taxpayers making less than $1 million but more than the lowest earners who qualify for earned income credit are statistically less likely to be audited. Filing a Schedule C increases the likelihood of being audited. Also, filing for earned income credit makes it more likely you will face an audit. So make sure in both cases you file accurate returns and keep good records in the event you face an audit one day. Another thing for those filing a Schedule C to consider is that consistently filing losses on a Schedule C could be a potential red flag to the IRS that the taxpayer has more of a hobby than a business, which would require further scrutiny through audit
It seems simple, but this is probably the best advice you can take away from this if your goal is to prevent an audit and survive one should one come your way. Don’t take liberties with the numbers and be honest. Like my grandmother always says, “The truth will stand when the world is on fire.”