The IRS has increased its focus on tax evaders and fraudulent tax returns, with most attention on those earning over $100,000 or businesses worth over $8 million. To reduce the chances of being audited, ensure all tax information is correct, reduce business expenses related to entertainment, food, or your car, and keep detailed records of income and expenses. However, some audits are selected at random, so be prepared with accurate and complete information.
A company or individual is audited when the Internal Revenue Service (IRS) decides to take a closer look at how they have filed their tax returns. Being audited isn’t much fun, even if the person or business has been completely honest and forthright 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 begun an aggressive campaign to find and address tax evaders and those who file fraudulent tax returns. Most of this focus is on people who earn more than $100,000 US dollars (USD) per year, or businesses worth more than $8 million. Almost 2% of the people and companies in this group are audited each year. For people who make less than $100,000 each year and small businesses, the chances of getting audited drop dramatically immediately, with less than half of the 1% being audited, a number that seems to be holding pretty steady, if not dropping a bit. .
There are a few things that a person or business can do to lessen their chances of being audited by the IRS, most of which are fairly straightforward. The IRS has a few things that they consider to be high risk factors, and removing or reducing them will reduce your chances of coming under greater scrutiny. Most accountants will point out the worst of these “red flags” during your tax preparation process, but there are a few steps you can take early on to ensure that come tax day, you’re in the best position possible. to avoid an audit.
The first and most important thing is to ensure that all the information on your tax form is correct. Most audits occur when the IRS realizes that a social security number or tax number has been reported incorrectly or that the numbers on tax forms do not add up. Double check and double check the information you submit to the IRS to make sure little mistakes are not made and you will drastically reduce your chances of being audited.
Eliminate or reduce business expenses related to entertainment, food, or your car. The IRS considers these three areas some of the largest potential incursions for incorrect reporting. Many individuals and businesses claim these expenses for business purposes, when in the eyes of the IRS they would be better classified as personal. If you’re claiming entertainment, dining, or auto expenses as business write-offs, make sure you have supporting documentation, and if you’re concerned about an audit, be aware that claiming even the appropriate write-offs in these areas can trigger an audit.
Lastly, keep in mind that any area in which you can stand out from the average person’s submission will make you more likely to get audited. If you live in a high-cost area like Beverley Hills and claim an income of $20,000, the IRS will probably be suspicious. Likewise, if you have a small salary and are claiming higher than average deductions, they will want to verify that you have the documentation to back it up.
Ultimately, minimizing your chances of being audited can only get you so far. A decent percentage of the audits the IRS performs are selected completely at random, and no amount of care on your part can fully protect you. The best protection you can have is to be prepared for an audit, should one occur, by keeping detailed and well-organized records of income and expenses and making sure that all the information you submit is correct and complete.
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