Audit Red Flags! How to Avoid the IRS Audit Radar

Receiving notice that you or your business is getting audited is probably one of the biggest fears during tax season. Most of the time, you’re in the clear. Each year, the IRS audits approximately one percent of individual tax returns and 2.5 percent of small business tax returns. But there are still ways to ensure your path never crosses with an IRS agent.

Here are four steps you can take to stay off the IRS’s radar:

  • Organize Your Forms

Forgetting a tax form or submitting an incomplete one is a great way to get noticed. Organize your information prior to filing, and ensure you have all the necessary data beforehand, so you’re not scrambling at the last minute. Incorrect 1099 forms and incomplete Schedule C forms are common mistakes for business owners, so pay close attention to how much you pay your vendors and other contractors, and exactly what you’re reporting as a loss – details matter.

  • Keep Accurate Records

Especially for business owners, maintaining an accurate, thorough record of all receipts and expenses is important. If you work from home, drive your vehicle for business, use your cell phone for work, dine out for business, or claim any other small business deduction, be sure you can produce appropriate receipts if asked. A good rule of thumb is to make a note on each original receipt what the business purpose was and the name of your customer or vendor. For mileage, keep a log book in your vehicle.

This goes for charitable deductions, too. Donating to charity can be an easy way to save money on your taxes – if the donation is legitimate and you can produce accurate records.

  • Justify Odd Numbers

Did you make substantially more or less money last year? Did you make an unusually large donation to charity? Are you claiming a substantial loss for bad debt or business losses? Any significant variance from the norm is likely to raise an eyebrow. High-income taxpayers, like small business owners, tend to receive more IRS scrutiny. Other things to keep in mind: Business losses more than three years in a row are questionable, and donations to charity above $250 need supporting documentation.

  • Maintain Domestic Bank Accounts

If you have foreign bank accounts, that increases your chances of an IRS employee taking a second look at your return. The Foreign Account Tax Compliance Act has strict reporting requirements, and transparency is paramount. For those with foreign assets, file Form 8938.

Even if you are audited, the IRS will send you a letter as the initial form of contact. They will never call you first, and they will never email or text you. The IRS also will never threaten you, or demand money on the spot.

All in all, good recordkeeping is essential. It will save you if the IRS asks for proof of your business deductions, and it’ll also save you time and stress as Tax Day approaches. If you have questions on good record-keeping policies or how to avoid IRS scrutiny, contact our tax professionals today.