Important Ways To Avoid A Tax Audit
We all file taxes each and every year. It’s unavoidable and for most of us, not something we enjoy. So, the last thing you want is to get a call, months or even years later, informing you that you are under a tax audit!
Today we look at several simple but important ways for you to do your best to avoid a tax audit.
Having a checklist each year to be sure you’ve taken the right steps to make your filing a smooth process is worth the effort.
Here are two ways to avoid a tax audit.
Report all your income
This may seem obvious, but leaving off any income could have you facing down the tax man.
The IRS will go after taxpayers when the agency has a document, like a 1099 or W-2, that matches income with a Social Security number if you don’t report it, said Mike Campbell, a certified public accountant and tax partner at BDO USA.
That includes any 1099-MISC or 1099-K you may receive from a side hustle, like driving for Uber or renting out your place on Airbnb.
The same is true if you have holdings overseas. You are required to fill out an annual report of foreign bank and financial accounts and Form 8938 to the Treasury Department and IRS if you own international assets.
Detail your big deductions well
IRS auditors focus on the outliers. Why? They don’t have the manpower to do much else.
The number of IRS staff that enforces tax laws has declined 23 percent from more than 50,000 in 2010 to fewer than 39,000 in 2016.
“The IRS is looking for deductions that don’t make sense,” Campbell said.
Huge losses on your rental property, large charitable donations relative to income and suspicious round numbers on your returns will raise an auditor’s eyebrows.
Charitable giving is particularly troublesome. For example, you paint an audit target on your back if you fail to file a Form 8283 for noncash donations of more than $500.
However, no deduction is incriminating if you have the documentation to back it up. – CNBC
More Ways To Avoid A Tax Audit
Here are three more ways to avoid a tax audit. Take the time to follow the rules when filing your taxes and you will save yourself stress and cash down the road.
Don’t neglect to file a return
You can draw the IRS’s attention if you don’t file a tax return. Even those with no income or no taxes due need to file a return, explaining that they have no income and/or demonstrating that they have no taxes due. Your odds of being audited are higher if you report no income — even if you’ve filed a return. For example, if you have your own business and you posted a net loss for the year, the IRS might want to double-check to make sure you’re not pulling a fast one. In 2014, about 5.3% of returns with no income were audited.
Don’t make mistakes
Be sure that any numbers you’re entering in your return are correct. Double-check your math and be sure you’re entering data in the correct boxes. One way to improve the accuracy of your return is to use tax-preparation software instead of preparing your return by hand, and to electronically file your return. Remember to sign your return, too, as unsigned returns can also draw the attention of the IRS.
Don’t leave out information
If you fail to report any income, or omit any other information, it can raise flags at the IRS and get you audited. It might just be a seemingly inconsequential dividend payment that you don’t want to bother mentioning, but it needs to be included — not only because it’s the right thing to do, but also because the IRS will probably already know about that payment to you and will be wondering why you haven’t mentioned it.
Entities that pay you generally report this information to the IRS — whether they’re reporting salary payments, dividend income, interest paid, or something else. The IRS then expects your return to include all of these payments. – The Motley Fool
Have you ever been picked for a tax audit?