Nothing scares the taxpayer more than the prospect of being audited by the Internal Revenue Service (IRS). However, you should find comfort in the fact that tax audits are a rare occurrence. In fact, a measly 1% of all returns were audited last year.
Of course, to avoid being audited, you should file your returns as stipulated by the law. Here are some additional tips to helpyou can avoid IRS officers.
Report All Income
The number one reason why the IRS conducts audits is because of the failure to report all sources of income. However, you should never contemplate taking this route because the agency has every copy of the W-2 and 1099 forms received by you.
For people who make money off capital gains, it is mandatory to fill out their respective Schedule D forms. You must also factor in miscellaneous income.
Assess Your Data
Data entered on the tax forms must be consistent with your income records; the IRS has software that compares the two aforementioned sets of data and reports any inconsistencies. If the two don’t match, it’s highly likely that the taxman will conduct a tax audit.
To avoid making errors, it is advisable to use software designated for preparing tax reports, even then, you must exercise care when keying in the figures. Alternatively, you can enlist this service of a tax professional to assist you with this process. Even so,the data provided to either the software or the tax professional needs to be double-checked for accuracy. It’s also important to wait for all income reports before starting the filing process.
Taxpayers often overstate their charitable contributions to reduce their tax liability. But since the IRS knows your income range, they also have a good estimate of the maximum amount you can donate to humanitarian causes.
You can also catch the attention of the IRS by indicating dubious expenses on your tax report, such as unrealistic expenses to get higher tax deductions. All claims must be validated by receipts or other relevant documentation.
Make Money (But Not Too Much)
You need money to survive, and the IRS is well aware of this fact. If your business is continually making losses every year, that usually raises a red flag. Likewise, if your expenses are more than your earnings, the taxman will take notice. On the other hand,too much income attracts the attention of the IRS too. Stats show that taxpayers whose gross income exceeds $10 million per year make up the majority of audited reports — approximately 35%. In contrast, people who make up to $80,000 annually contributed only 0.5% of the audited reports.
Double Check Your Report
Humans make errors; it’s a fact of life. So always double check your report before putting it in the mail. And when you do find errors, instead of neglecting them, fix them to reduce your chance of being audited.
Include explanations if you think that your tax returns will raise concerns. Some of the items that raise flags include your name, dependents, expense, income, and deductions. Explanations should be backed by relevant documentation such as receipts, checks and other supporting records. Although the IRS computer might detect inconsistencies, a human IRS officer will be able to examine the attached explanations and clear you from a potential audit.
Get the Timing Right
According to a majority of tax advisors, filing late reduces your chances of getting an audit. Indeed, a sizable portion of these consultants says that you should file for extensions because the IRS usually earmarks their targets for auditing every financial year before the extension deadline. Regardless, all taxes should be paid before the April 15 deadline, as failure to do so can result in penalties.
The best way of reducing the chances of a tax audit is by filing a return. That being said, there is no surefire method of entirely avoiding a tax audit by the IRS. The good news is, following these tips you should have nothing to fear when the taxman comes knocking.
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