There are several steps that any individual or business can employ to reduce the chances of getting an IRS tax audit. Though one cannot completely avoid an audit, these steps will help you remain in the IRS's "good books."
Provide Complete Information
One of the sure ways of getting an audit or a call from the IRS with questions is to provide incomplete or vague information on your returns. Ensure that you have provided clear answers to all questions on all your tax return forms. Ensure that you fill out the right sections, including all information. This especially applies for income disclosure. The IRS has very robust counter-checking systems that match incomes from various taxpayers. If there is any mismatch on the incomes as filed by the different tax payers, this will warrant an immediate questioning or a subsequent IRS tax audit. If there is an income mismatch, you will be expected to either pay the expected dues or provide an explanation for the disparity. An IRS audit can be conducted up to 3 years after filing returns if your incomes are understated and up to 6 years if that understatement was of by 25% and beyond. Therefore, ensure that you provide full disclosure and clear information.
Verify and Confirm Details
Another area that can attract an IRS audit is if you have errors in your details or miscalculations here and there. If your personal details, such as the Social Security Number, are written incorrectly, the IRS will surely inquire about this. One of the ways of reducing calculation errors is by submitting electronic tax returns. As most addition work is automatically done by the system, this in turn, means there are less chances of mathematical errors. In fact, the IRS statistics show that mathematical errors are reduced from 20% to 1% when people opt to shift from manual to electronic tax returns.
Research on Your Tax Preparer
One of the areas that can easily trigger an IRS tax audit is in the matter of your tax preparer. According to a National Taxpayer Advocate report in a survey conducted recently, 6 out of every 10 households use a tax preparer to submit their tax returns. However, since these tax experts have learned a lot about the tax system and they are aggressively seeking deductions for individuals, IRS is now intensely monitoring them to review their claims and to ensure that they do not overvalue their client tax deductions. If the IRS gets a specific tax preparer claiming deductions that are unwarranted, the IRS will normally take an IRS tax audit on all the other clients who use the same tax preparer. Therefore, to avoid getting an IRS audit under such circumstances, ensure that you conduct a thorough examination and reputation check on the tax preparer to handle your taxes. One way of doing this is by verifying the tax consultant's standing with the IRS's office of Professional Responsibility.
Avoid Audit Red Flags
There are various things that can trigger an audit based on different expectations of the IRS; the IRS warns against filing red flag deductions, though such deductions are not clearly defined. However, some tax actions will easily result in an audit. For example, if you change the status of your business, like if you convert a hobby into a profit opportunity (a business), and fill out Form 5213 to keep the
from auditing you in the first five years, you can be sure that the IRS will conduct an audit immediately after these 5 initial years. You will then need to prove that you are running the business with a profit motive, especially if you have claimed any tax deductions from losses made. Another avenue to attract an IRS audit is if you make personal claims that may seem suspicious. The IRS uses a system called Discriminant Function System that is based on statistics gathered over time. Through the system, they have various expectations on deductions and claims based on your income level among other factors.
Provide Complete Information
One of the sure ways of getting an audit or a call from the IRS with questions is to provide incomplete or vague information on your returns. Ensure that you have provided clear answers to all questions on all your tax return forms. Ensure that you fill out the right sections, including all information. This especially applies for income disclosure. The IRS has very robust counter-checking systems that match incomes from various taxpayers. If there is any mismatch on the incomes as filed by the different tax payers, this will warrant an immediate questioning or a subsequent IRS tax audit. If there is an income mismatch, you will be expected to either pay the expected dues or provide an explanation for the disparity. An IRS audit can be conducted up to 3 years after filing returns if your incomes are understated and up to 6 years if that understatement was of by 25% and beyond. Therefore, ensure that you provide full disclosure and clear information.
Verify and Confirm Details
Another area that can attract an IRS audit is if you have errors in your details or miscalculations here and there. If your personal details, such as the Social Security Number, are written incorrectly, the IRS will surely inquire about this. One of the ways of reducing calculation errors is by submitting electronic tax returns. As most addition work is automatically done by the system, this in turn, means there are less chances of mathematical errors. In fact, the IRS statistics show that mathematical errors are reduced from 20% to 1% when people opt to shift from manual to electronic tax returns.
Research on Your Tax Preparer
One of the areas that can easily trigger an IRS tax audit is in the matter of your tax preparer. According to a National Taxpayer Advocate report in a survey conducted recently, 6 out of every 10 households use a tax preparer to submit their tax returns. However, since these tax experts have learned a lot about the tax system and they are aggressively seeking deductions for individuals, IRS is now intensely monitoring them to review their claims and to ensure that they do not overvalue their client tax deductions. If the IRS gets a specific tax preparer claiming deductions that are unwarranted, the IRS will normally take an IRS tax audit on all the other clients who use the same tax preparer. Therefore, to avoid getting an IRS audit under such circumstances, ensure that you conduct a thorough examination and reputation check on the tax preparer to handle your taxes. One way of doing this is by verifying the tax consultant's standing with the IRS's office of Professional Responsibility.
Avoid Audit Red Flags
There are various things that can trigger an audit based on different expectations of the IRS; the IRS warns against filing red flag deductions, though such deductions are not clearly defined. However, some tax actions will easily result in an audit. For example, if you change the status of your business, like if you convert a hobby into a profit opportunity (a business), and fill out Form 5213 to keep the
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