Minimizing the Chances Being Audited by the IRSDuluth CPA on How to Avoid IRS Audits
Every year the IRS selects approximately one to two percent of all tax returns filed. The U.S. tax system is a voluntary compliance system where it is a taxpayer's responsibility to determine and file their accurate and just tax returns. In this process frequently taxpayers will create environments, which make the IRS more apt to review and audit a return. Your intent in filing a return should never be to stay away from or not deduct a valid deduction, however your end result should always be to file a return that is accurate and complete in all respects and for which you have adequate and clear documentation. By following these steps below you will find insight that will help you avoid unnecessary audits, additional time and stress, and additional assessments for interest and penalties.
Reporting taxable income
"Failure to report all of your income is a ‘sure fire’ way to obtain an audit letter from the IRS."
—- Duluth CPA President, John Dillard CPA
Frequent errors include failing to report interest income, dividends received, stock sales, alimony. For individuals who have an unincorporated business one of the most common errors is that taxpayers incorrectly assume they are only to report income for which they receive a Form 1099. This is one of the larger errors of judgment that occurs, resulting in an audit. Tax law is clear; taxable income, of all types, should be reported regardless of whether an individual or a business received any such reporting or form.
Avoid tax shelter schemes
The IRS, courts, law enforcement officials, and essentially all levels of local, state, and federal government take a very dim view of those who seek to defraud the government. Just as there are no true get rich schemes in life, so are there are no valid and legal ways to avoid taxes other than valid deductions which exist under tax law. Tax shams of all types will tempt you by enticing you to take invalid deductions, create businesses that do not exist, and many will mislead you into believing that taxes are unconstitutional. Run away and avoid at all cost opportunities to defraud you from paying your correct tax.
Operate a legitimate business
Tax law and their enforcement take a dim view of those who seek to take deductions for a business, which is not real or legitimate. Often taxpayers cause havoc to themselves by claiming deductions for businesses where there is no true profit motive or they claim business expenses for a hobby, which is personal in nature and therefore not deductible. In fact, tax law states that anything done exclusively to avoid the valid payment of just taxes due is void from the outset.
Accordingly the deduction of invalid expenses of any type (business, itemizations, etc.) should never be listed on a return. Business owners should always strive to make as much money as possible and hope that after you have taken every legitimate business expense that you are able, that your ultimate tax bill is high, as this represents success. To help avoid an IRS audit taxpayers should only enter into businesses where there is a true profit motive and not one of illegal tax mitigation. If you always tell the truth in accordance with tax law you will not only sleep better but also dramatically reduce your likelihood of an audit.
Charitable contributions and their attendant changing rules and documentation requirements are frequently an area where errors occur resulting in an audit. The predominant issues are simple. Taxpayers should only list charitable deductions, which are given to a duly authorized charitable organizations/ a 501(c) 3. To ensure that you have a paper trail, all of these monies are best given by check and taxpayers should be sure to obtain a year-end receipt while ensuring that all cash contributions have been recorded.
For property contributions, frequently taxpayers will fail to be aware of current law and take deductions well in excess of what would otherwise be deemed to be fair market value. For instance, when donating household items and clothing be sure that you get a dated and signed receipt from the charitable organization listing in detail all items while listing their value at fair market value. The most widely used methods for determining this would be what the items would sell for at a flea market, thrift store, or yard sale.
Being Clear/Good Documentation
Tax returns should tell a story. Like a good book they should be straightforward and easy to follow. Returns that are confusing, conflicting, and unclear are apt to receive a letter from the IRS or state seeking either clarification or announcing an audit. If there is a complicated transaction or an expenditure or tax position that might be difficult for an independent observer to follow, attach a detailed explanation clarifying how the return was prepared. If you have a particular deduction that might appear out of the ordinary, such as a large charitable deduction, go ahead and attach a copy of the receipt from the charitable organization to pre-answer any questions that might arise. Also be sure to keep copies of all tax documentation as required by tax law in order to be able to prove any deduction claimed on any of your filed returns.
By being informed and staying so you will best be able to avoid unnecessary bumps along the way. Tax law is confusing enough without having to become familiar with the compliance and audit departments as well. If you have received an IRS audit letter immediately call your CPA. By doing so you will help mitigate the likelihood that you will make a bad situation worse by attempting to represent yourself. Perhaps you have heard the expression that "a person who represents himself has a fool for a client."
At His CPA PC we are focused on keeping your tax bill as low as legally possible while avoiding any unnecessary steps along the way. Put our "keep it simple" style to work for you and your business today.
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