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The IRS is aggressively targeting tax evaders and fraudulent tax returns, with a focus on high earners and large companies. Individuals and businesses can reduce their chances of being audited by ensuring all information on their tax form is correct, reducing expenses related to entertainment, food, and cars, and avoiding distinguishing themselves from the average filer. However, some audits are selected randomly, so being prepared with detailed and organized records is important.
A business or individual is audited when the Internal Revenue Service (IRS) decides to take a closer look at how they have filed their tax returns. Getting audited isn’t much fun, even if the person or business has been completely honest and open in their dealings with the IRS, so learning how to minimize the chances of being audited is important to many people.
In recent years, the IRS has embarked on an aggressive campaign to find and address tax evaders and those who file fraudulent tax returns. Most of this focus is on people making over US$100,000 (USD) a year or companies that are worth more than $8 million. Nearly 2% of people and businesses in this category are audited each year. For people making less than $100,000 a year and small businesses, the chances of being audited drop sharply immediately, with less than half of the 1% audited, a number that appears to remain fairly stable, if not declining.
There are a few things an individual or business can do to reduce their chances of being audited by the IRS, most of which are fairly simple. The IRS has some things they consider high-risk factors, and eliminating or reducing these will reduce your chances of being further scrutinized. Most accountants will point out the worst of these “red flags” during the tax preparation process, but there are some steps you can take early on to make sure that, come tax day, you are in the best possible position to avoid a audits.
First is to ensure that all information on the tax form is correct. Most audits occur when the IRS finds that a Social Security number or Tax ID has been reported incorrectly or that the numbers on your tax forms don’t add up. Check and double-check the information you submit to the IRS to make sure there are no small errors, and you will drastically reduce your chances of being audited.
Eliminate or reduce business expenses related to entertainment, food or cars. The IRS considers these three areas to be some of the biggest potential forays into misreporting. Many individuals and businesses incur these expenses for business reasons, when in the eyes of the IRS they would be better classified as personal. If you claim entertainment, dining or car expenses as business cancellations, make sure you have the documentation to support it, and if you’re concerned about an audit, note that claiming appropriate cancellations in these areas can also trigger an audit.
Finally, keep in mind that any areas where you might distinguish yourself from the average filing person will make you more likely to get vetted. If you live in a high-cost area like Beverley Hills and claim income of $20,000, the IRS will likely be suspicious. Likewise, if you’re on a small salary and claiming above-average deductions, they’ll want to check that you have documentation to back it up.
Ultimately, minimizing your chances of being controlled can only get you so far. A fair percentage of audits conducted by the IRS are selected completely randomly, and no amount of care on your part can completely protect you. The best protection you can have is to be prepared for an audit, should it occur, by keeping detailed and well-organized records of entries and exits and ensuring that all information on file is correct and complete.
Smart Asset.
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