An audit by the IRS usually involves verifying that your tax returns are correct. It is routine in most cases but having IRS agents comb through your finances can still be worrying.
The IRS announced in late 2020 that it is hiring new auditors as it plans to increase audits by at least 50%. Consequently, your chances of getting audited may have increased considerably. There are, however, ways to limit the logistical hassle of having IRS agents run through your finances and documents — the idea is to avoid raising any red flags. Here are six considerations for limiting your IRS audit potential.
Your employer is obligated to provide the IRS with copies of your income documents. These include W-2 and 1099 forms. Additionally, the agency has sophisticated computers and algorithms that help track income in the form of cash. The IRS tracks and matches this information with your reported income.
It is essential to report all of your income, regardless of how minimal it may seem. This includes the information sent to the Social Security Administration and your state’s authorities. The income reports from the IRS’s end should match your reported income. Otherwise, the agency will send auditors to track the unreported income.
The IRS analyzes every taxpayer’s income report. However, they pay closer attention to large incomes. For example, taxpayers earning more than $10 million have a higher chance of being audited than taxpayers in the middle class. As such, top earners are advised to be especially careful when tracking and reporting their income.
Many people rush to file their tax returns at the last minute. This is one of the common causes of triggering an audit. It is an easily preventable problem, especially considering that the e-file system is specifically designed to make the process easier.
It is always advisable to file your taxes several weeks or days before the due date. This affords you enough time to ensure that all the information provided is correct, saving you the trouble of filing an amended return later.
However, you can always file for an extension if you are worried that time is running out. An extension is especially advisable if you cannot get all the necessary documents and are worried about filing an amended return later. This is because amended returns take longer to process and attract greater scrutiny from the agency, increasing the likelihood of an audit.
You can save hundreds (or even thousands) of dollars by requesting tax deductions and exemptions. For instance, you can deduct up to 100% of your meals and travel expenses for 2020-2022 as part of the Consolidated Appropriations Act. You can also claim a sizable deduction if you have a home office or often make charitable donations.
Consequently, some taxpayers try to use this as a loophole to defraud the IRS. Keep in mind that all deductions and exemptions you may claim will be closely monitored and dissected. As such, it is important to ensure that your claimed deductions are valid. Additionally, don’t be tempted to inflate the value of these deductions, as the IRS will take note and come calling.
Deductions may be difficult to explain when an audit arises. However, this shouldn’t discourage you from claiming legal deductions. It is important to remember to keep receipts and any other documents that support every deduction in your claim as proof if the taxman needs verification.
Filing tax returns often proves daunting for many people, especially when some records are missing. Some taxpayers get confused and make unintentional mistakes in their files. Common errors include the use of an incorrect social security number, skipping confusing parts, while others miscalculate their numbers and report rounded-up figures.
Such inaccuracies, albeit unintentional, are flagged down and closely inspected by the IRS. It is important to double-check your tax returns before submitting the files. Take your time and ensure that everything adds up.
The IRS conducts audits with the main goal of verifying your tax information. For example, your assigned agent may ask to see your travel receipts if you make a suspicious travel deduction. The IRS may also ask for different types of documentation dating years back if the audit necessitates it. Intrinsically, it is advisable to keep comprehensive financial records dating at least three years back.
Comprehensive records are especially important for businesses, as they face a higher likelihood of an audit. Therefore, small business owners are urged to separate their personal and business expenses or open separate personal and business accounts.
Filing your tax returns can be intimidating. It is easy to make minor errors, but these are what trigger most IRS audits. These small errors can cost you in terms of time and money. This is why it is always advisable to consult a professional accountant if you feel overwhelmed or confused.
A professional accountant has the necessary skills and experience to file flawless tax returns. They will ensure that all details are correct, eliminating errors and minimizing the likelihood of triggering an audit. The accountant will also help you identify all possible legal deductions, saving you hundreds or even thousands of dollars.
Alternatively, you can use payroll software and other software designed to ease the tax return process. Though it is worth noting that most software solutions charge a premium and require some technical expertise to operate.
The IRS can decide to audit you for a range of reasons, including being selected randomly. However, you can take a few steps to limit your audit potential and feasibly avoid this stressful experience by ensuring that your tax returns are as pristine as possible. Practicing these tips can help keep you on good terms with the IRS. Hiring a professional to save yourself the work and significantly reduce the risk of getting audited is recommended but it is also important to remember that being audited does not mean you have done something wrong and should not mean you should limit your opportunity to take all of the legal deductions to which you are entitled.
TSP Family Office can help you identify the strategies that will save you money on your taxes. We promise to ensure that you don’t pay a dollar more in taxes than you owe. Use our advanced tax savings calculator to find out how much you can save, and get in touch via (772) 257-7888 to learn more about how we can help.