Tax Audits: How to Avoid Them

The tax season is nearly over, meaning that you should have filed your taxes. However, for some people, that is not the end of the tax season. Those people whose tax returns draw the attention of the IRS may be called in for an audit.

Audits are commonly very long and detailed processes and chances are that they will find something wrong, even through your carelessness and not any malicious intent. If you are chosen for an audit, make sure to consult a tax attorney to help you, because they are skilled at managing the paperwork for the audit. However, if you want to avoid being audited in the first place, you should know more about how audits are chosen and conducted.

Automated Process

The process of choosing the people to be audited goes through a computer program, which means that there is no human handpicking cases for the audit. Still, that doesn’t mean that it is completely random.

In fact, it is a really complex and detailed computer program which compares your tax returns with those of people similar to you in terms of a tax bracket, education, work place and probably other factors as well. However, a small percentage of audits is selected at random.

What that means is that if your tax return is too disparate from those of your peers, you are likely to be invited for an audit. Some people may feel discouraged to take advantage of all the breaks they are entitled to for this reason. However, if you have the paperwork to back up your claims to these breaks, by all means, take them.

Some Businesses Are More Frequent Audit Targets

There are certain professions which are more interesting to the IRS for one reason or another. If you are in one of these professions, make sure to keep immaculate records, because you are more likely to be targeted.

Cash-based businesses like restaurants, hairdressers and laundromats are likelier targets than other businesses. Also, more high-profile professions which don’t always have fixed rates, like doctors and attorneys can also expect to be audited more often. Even the accountants themselves may be subject to closer scrutiny by the IRS.

People who are self-employed may be better off creating an LLC because this business format is less likely to be audited than other similar small companies. Being eligible for mode deductions is just an added bonus.

Explain Your Deductions

When submitting your tax returns, make sure to have plenty of records attached, because a sparse documentation can attract questions and a possibility of an audit. Especially if you are filing for deductions, make sure to explain how and why you are filing for those, giving some proof as often as possible.

One of the things that draw additional attention to your tax return is filing addendums or revisions of your tax return. That means that you should take enough time and effort to complete your taxes in a timely manner. If you file your taxes in bits and pieces, you are more likely to find yourself as a likely target for an audit.

Disclose Any Offshore Accounts

If you have an offshore account, you may think that you have beaten the system, but eh IRS has been keeping a much closer eye to these in the recent years. If you are caught with an undisclosed offshore account, you may be facing some serious legal ramifications.

However, if you take the IRS’s offer of disclosing your offshore accounts through the Offshore Voluntary Disclosure Program, you will be protected from prosecution.

The number of people audited has steadily been declining over the years, so the chance of being chosen is lower each year. However, to be sure that you are not among those selected, make sure to keep your accounts in order and your paperwork at the ready.

One Reply to “Tax Audits: How to Avoid Them”

  1. There is a way to avoid an audit 100% of the time….DO NOT FILE A TAX RETURN. I haven’t filed a return with the IRS in over 25 years.

    Filing a “tax return” is like inviting a thief into your home and telling them to take what they want.

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