Facing an audit by the IRS can be a daunting situation for any individual or business. Even if all your taxes are in order, audits can take a lot of time and energy. Fortunately for the taxpayer, the IRS Restructuring and Reform Act of 1998 resulted in kinder and gentler practices from the IRS. Unfortunately, due to extremely low audit rates in years following, resulting in political embarrassment, audit rates have begun to climb back up. Everyone should make sure to file their tax return properly each year, but there are some people who should be warier of an audit than others. These people include high income earners, people filing a business tax form (especially large corporations), and people claiming the earned income tax credit (EITC). To avoid being audited, it may benefit you to treat the situation like a battle with the IRS, where the first defense is a strong tax return.There are two primary goals you should have when filing your tax return and making sure everything is accurate and unlikely to hurt you if audited. These two things are keeping good records and inquiring with the IRS itself when there is something you are unsure of. If you follow the guidance of this article, it will reduce the likelihood of being audited or violating any tax rules.
The first step in preparing yourself for filing and protecting yourself from the IRS is to keep good records of the necessary financial documents. Currently, the IRS can go back three years in any given audit, six years if it is believed your gross income was under-reported by more than 25%, and however many years if you did not file at all. This means all financial documents should be kept for at least three years, with some being kept for six and others forever. The information you will only need for three years are things related to payroll expenses, asset valuation, invoices, and inventories. Records related to revenues and sales, bank statements, and records relating to travel and entertainment expenses should be kept for six years. All other, more significant documents should be kept forever, such as financial statements, copies of tax returns, audit reports, and general ledgers. If you follow these guidelines, you will be prepared to file a strong, well-constructed tax return.
The second task you must undertake when preparing to file is seeking advice from the IRS. This advice can come in a variety of forms, with the most common being IRS website publications and the instructions found on tax forms themselves. Following the instructions on the forms, logically, will lead you in the right direction when making sure to follow tax laws. If you follow the instructions while filling out the forms, the IRS will have little reason to audit you. Additionally, if you have any questions that are not sufficiently answered by instructions on the form, it is best to visit the IRS website and try to find any related publications. Understanding the proper way to engage with the IRS regarding your tax return will make the process simpler and help you avoid an audit.