One of the biggest fears a taxpayer may have is the dreaded phone call from the IRS or the letter in the mail labeled AUDIT.* Although your chances of being audited are slim (only 1% of U.S. taxpayers are selected), there’s good reason to want to avoid it—if the IRS finds out you’ve misreported income or expenses, you could be faced with back taxes, hefty fines, and possible jail time.
The selection process isn’t random; the IRS selects taxpayers for auditing if their returns raise questions—things like large deductions, extravagant purchases on a meager income, and cash-only business transactions are a few of the red flags that might put you on the top of the list.
Luckily, there are a few things you can do to keep your taxes in order and stay on the good side of the IRS:
Hire a Tax Professional
Using the services of a licensed accountant can save you time, headache, and in many cases a great deal of money. Not only will a professional tax preparer help you understand and avoid the mistakes novice taxpayers make on their return (claiming deductions, reporting expenses, and missing out on valuable tax credit options), but if you do get audited, you can rest easy knowing that you have a professional on your side.
Keep Fastidious Records
Want to report a large charitable donation or claim a deduction for a newly constructed home office? You better have receipts for everything. Businesses like bars and restaurants are also particularly vulnerable to auditing selection because of the room for error in cash-only transactions. But an auditing can be a breeze if you have clear, organized records for all income and expenses. Don’t wait until tax season to try to scrape everything together, either—keeping a file year-round that documents all tax-related transactions can save you a lot of time in the end.
Be Wary of Too Many Deductions
The IRS will take notice of you if you begin deducting every expense as a business-related purchase, especially if your income isn’t very high. In fact, they use a computer program that compares your deductions to those of other taxpayers in your bracket—so while you think you may be flying under the radar, it only takes them seconds to sniff out an unemployed freelancer’s $1,000 deduction for airfare to Hawaii. So be careful, be honest, and if you have any questions or doubts about which expenses qualify, hire a tax professional who can put your mind at ease while helping you prepare the most beneficial return possible.
*Note: the IRS will never email you to initiate an audit.