The Internal Revenue Service is set to get an additional $80 billion and a big chunk of this will be spent upping their enforcement efforts. This means more penalties for rule breakers, but also more audits.
While the IRS states that they do not intend to increase audits for small business owners and lower–income earners, the possibility of an audit still looms for many. We’ve put together this list of ways to avoid an IRS audit to give you a little peace of mind going into this next tax season.
1) File your taxes on time.
You’re worried about what you may owe come tax time, so you decide to just not file this year. Or you think you didn’t owe much or anything, so you don’t need to file. In both scenarios, you’d be a prime suspect for an audit. Not filing a return is one of the biggest red flags to the IRS!
Make sure you file your return every year, even if you didn’t bring in any income that year. File your return by the deadline – April 18, 2023, for 2022’s returns – or file an extension.
Did you know you can make payment plans with the IRS? Don’t avoid filing if you don’t think you’ll be able to make your full payment. If you put it off and miss the deadlines, you can face some big penalties that will only make paying off the tax debt harder.
2) Double check your numbers.
Make sure you are not omitting any income. Leaving off even a small amount of income you earned that year can make the IRS want to look into your return further. It might be a pain to gather the documents for each tiny dividend you receive, but the company paying you that dividend is going to report the payment on their returns. When the IRS sees the payment on their side, they’ll check to make sure it’s on your side, too.
Same thing goes for double checking all of your numbers. If the IRS can’t match your income figure to the payer’s number, they’ll start asking questions. Make sure you are copying down the right numbers from your tax documents.
3) Don’t round.
One of the easiest ways to avoid an IRS audit is by not rounding. When the IRS sees nice round numbers on your return, they’ll flag your return for further inquiry. This is because it’s very rare in the real world to have anything come out to a round number.
Rounding your figures means you are estimating – and the IRS doesn’t want you to estimate. Instead of rounding up on a seemingly trivial expense to get a slightly higher deduction, report the actual amount you incurred.
4) Be honest.
On the same train of thought of “don’t round” – be honest on our tax return! If you are a small business or are self-employed, you are at a higher risk for IRS attention due to the claims you will probably make on your return. In the event of an audit, you will have to substantiate all of those claims. Make sure you aren’t stretching the truth and only report things you can back up.
5) Claim deductions you know you qualify for.
You started working from home and want to claim the illusive home-office deduction to reduce your tax burden. Checking your morning emails on the couch every day doesn’t mean you can claim your new sectional on your tax return, though.
Go about it the right way and read up on what criteria you need to meet in order to get that deduction. Learn more about home-office deductions in our article here.
6) Get your 1099s out on time.
As a small business, you may be diligent in giving out your W9 to clients in order to get paid on time. You should maintain that same diligence when issuing 1099s to your own vendors and contractors. This is an especially important way to avoid an IRS audit. The IRS places high importance on 1099s and will flag your return if you did not issue them properly (or at all).
7) File electronically.
The IRS says that over 21% of paper tax returns contain errors compared to less than 1% of electronically filed returns. E-filing has been around for a long time and if you haven’t started using it, you really should. The more errors in your return, the higher the likelihood of an audit. Plus, e-filing usually means you can get your refund back much quicker as you don’t have to wait on snail mail.
8) Use a pro.
There’s a reason why so many people use tax preparers for their returns. Beyond saving you time and money, a tax professional can reduce the risk that you may be audited. Of course, there’s no guarantee when it comes to the IRS. But we know all the rules and can help set you up for success.
These 8 ways to avoid an IRS audit are only the tip of the iceberg. Click here to see how we can help you avoid that audit and get the most out of your taxes.