The Tax Man Cometh: How to Avoid an Audit
A wise man once said that there were two things in life that were certain: death and taxes. But while they're inevitable, that doesn't mean you should have to live in constant fear of a tax audit.
Here's a quick look at some of the factors that are looked for in tax returns when they're flagged for an audit and how to avoid one if possible.
Are you in a cash business? If you're in a profession that regularly receives tips, or if you keep your own books as a professional, you're already in the crosshairs. Be very meticulous about all the deductions you take, make sure you have the paperwork to back them up and avoid miscellaneous deductions that may look suspicious.
If you're self-employed, incorporate. Self-employed persons who file a Schedule C are more likely to be audited than corporations, plus the incorporation process provides you with opportunities to take advantage of additional deductions. If you don't incorporate, keep meticulous records and consider having an outside business handle your tax prep and return.
Don't be afraid to overexplain. If you have a lot of extra deductions, especially for your income bracket, plan on including additional documentation to reduce your chance of having an audit. Worksheets or receipts provide documentation before it's needed.
Watch what you're writing off. There are certain categories that are strong flags for audits because they've been commonly abused in the past. These include bad debt expenses, home office space, casualty losses, travel expenses, medical expenses and similar categories.
Avoid adding amendments or extensions. These are flags to the IRS that your return may not have had all of the information in the first place, which is a red flag for an audit. An amendment makes your return stand out.
Though these tips can't guarantee that you'll always avoid an audit - thank you, random audit process! - they can greatly decrease the chances that you'll be flagged for an audit because your account looks suspicious. If you're concerned about the outcome of your tax return, the accounting professionals at AccountRely can help you make sure you have everything in order before you submit your return. Please feel free to contact us today and discover the difference AccountRely makes.