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Avoiding IRS Tax Audit |
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In 1997, the IRS audited 1.66 million taxpayers. As a percentage that is 1.5% of all taxpayers. The main reasons for audits are when a taxpayer’s deductions are too high in relation to his/her income and there are tax items that need explanation or are erroneous. So how do you ensure that you are not part of this small percentage of taxpayers picked up by the IRS for an audit?
The IRS does not have enough resources to audit every taxpayer. Therefore, they have a system of picking the ones which are most likely to have a tax deficiency. Check if you fall under this High-Audit category. It ranges on a various number of factors such as your profession, your tax deductions, your income amount and types of income etc.
Most commonly, your chances of being audited are high if:
- Your business transactions on your tax return are complex
- Your business expenses in relation to your income are large
- You have claimed large contributions to charities in relation to your income
- You have been audited by the IRS before
- The company you are a shareholder or partner of have been audited by the IRS
- The itemized deductions on your tax return exceed IRS targets
Those who are self-employed must be extremely careful as the IRS believes that they are more likely to under report taxable income and claim too many tax deductions than a salaried employee. To find out what auditors are looking for when it comes to self-employed businesses, get a hold of an Audit Guide published by the IRS for auditors. You can call the IRS Freedom of Information Act Reading Room at (202) 622-5164 to get a copy.
Another target of the IRS is those claiming ‘home office’ tax deductions. If you have an office at home and you have substantial tax deductions to be made, then you should go ahead and claim it. But if your expenses are not very significant, it is best not claimed. Since the tax rules for home office deductions are complex, best consult a tax expert in this case.
Business transportation deductions are on the top end of the IRS tax deduction list. Therefore, taxpayers must take care to keep a record of automobile expenses and a mileage log of business miles. It might not be easy to keep a daily record of your business travel, but in the case of an audit this would come in handy.
The best way to avoid a tax audit is to file a complete and accurate tax return. Make sure you have got the correct forms, the correct amounts and the correct tax schedule. Also, make sure you have claimed all the tax deductions that are worth claiming. If you know any deductions stated in your tax return might raise a question and if you are not going to make a significant tax saving in claiming it, best not put it on your form. However, it is advisable to consult a tax expert such as CPA when filing to make sure you get back every dollar you can in a smart manner.
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