One of the things you definitely don’t want for your business, especially if you are an experienced IT consultant, is a tax audit. Even though the possibility of facing a tax audit from the IRS is generally low, it is still a major concern for many businesses. Normally, a tax audit is supposed to be as a result of errors or discrepancies in the process of filing a tax. However, there are exceptional cases where the IRS decides to randomly review some tax returns.
This means an experienced IT consultant like you can only try to avoid tax audit by reducing the chances as much as possible. The reality, therefore, is that you have to take note of some of the common red flags that can make you an easy prey. You sure don’t want to go through the hassles of being scrutinized. So, you have to make an effort on your part.
Sometimes, an extra level of attention is all you need to get yourself out of the audit radar. Fortunately for you, this blog provides a list of ten ways to prevent an IRS audit.
Ten Ways you Can Avoid an IRS Audit Especially as an IT Consultant
1. Hire a Tax Consultant for your IRS Audit
You may consider this as your first move in preparing your tax return appropriately. Basically, this is because enlisting the service of a professional gives the assurance that your tax return is in safe hands. It gives a considerable amount of confidence that the filing of your tax will be handled professionally.
The IRS notes via their official website that “sometimes returns are selected based solely on a statistical formula. We compare your tax return against “norms” for similar returns”. In another part, they explain: “if the auditor notes something questionable, they will identify the items noted and forward the return for assignment to an examining group.” So, we believe a tax expert might be able to help you avoid this altogether, to a great extent.
2. Double-check your figures for consistency
Even as you may have enlisted the service of a tax professional, it is highly advisable that you cross-check the figures. Mistakes happen, you know. So it’s imperative that you ensure the math on your tax form is perfect before you send your tax return. Remember, having wrong figures can easily call the attention of the IRS for an audit.
Make sure the information provided on your tax return matches the data on your government issued forms. The income amounts shouldn’t be different from what the IRS finds on your 1099 form. As you already know, any discrepancies observed between your 1099 form and your tax return may lead you to that audit you don’t want.
A fellow of the National Tax Practice Institute and president of the firm 1st Tax, Crystal Stranger, explains: “The IRS computers cross-check the information reported to them on your tax return with the information that is received from businesses filing informational returns. If this information is not a match, you are nearly guaranteed to receive a computer-generated audit letter.”
3. Confirm the Social Security Number (SSN) and other key details
One thing you wouldn’t want is to realize you’re getting audited because of mistakes in the SSN and other details you may have provided. It is easy to mistype or skip some items without even noticing it. So, ensure to double-check the SSN and other details to be sure there are no typographical or input errors.
However inconsequential it might seem, a mistake in the spelling of your name could in fact be the reason you get audited. Errors like this may also mean that you’d have to refile, which could lead to an unwanted delay in case of getting a refund.
4. Include all incomes in your tax report
It doesn’t matter whether the amount involved is huge or little, you should never leave out any income earned within the tax year. Record everything, including even the assets you sold during the year. Full transparency and completeness is key because a client of yours might have filled out the 1099 form and sent it to the IRS. Therefore, not being upfront with your incomes may simply amount to shooting yourself in the foot.
It may not matter if some of your earnings come from foreign activities too. Unreported offshore incomes might even come with legal implications, where it gets even uglier. “People need to understand that just because they’re saving or earning money outside of the U.S., it does not mean the money is free money,” said David Hryck, a tax attorney with Reed Smith.
5. Don’t mix business and personal expenses
Even if you use a personal bank account for your business, it is important that you separate your business expenses from the personal ones. Don’t be tempted to mix your business and personal expenses for the sake of tax reduction. That easily comes off as a dishonest attempt to the IRS.
Ask any top tax expert around, and they would definitely advise against it. They’d tell you that you have to ensure specificity. Kaplan notes for instance that “The IRS might think you are trying to invent nonexistent expenses if you lump together advertising or travel, rather than itemizing each specific advertising or travel expenditure.”
6. Include reasonable deductions only
Don’t think of overestimating your deductions as regards home office, meal & travel, as well as donations. You’ll get noticed by the IRS if you do that, as the deductions would be analyzed based on “statistical norms” for tax returns that are similar. You should only claim the deductions you can confidently back up in case of any inquiries.
Likewise, it is important to ensure that there isn’t so much difference in your deductions year after year. Claiming, for instance, a mortgage interest of $3,000 one year and $30,000 the next could be a big red flag. In line with this, Craig Smalley, the founder and CEO of CWSEAPA has asserted that “If there is a large differential of an amount from one year to another, it would increase your chances of being examined.”
7. Answer every question appropriately
It doesn’t matter if the answer is $0, you just shouldn’t leave any question blank on your tax form. All relevant areas have to be filled. The simple reason for this is to ensure no stone is left unturned, and to keep yourself off any extra attention.
8. Careful with rounding your numbers
It is advisable to leave your numbers in their original forms. No need approximating them. When it comes to filing a tax return, precision is key, especially because rounding numbers may be an indication of laziness or even utter dishonesty. If a figure is $499.92 for instance, let it be. It’s always better than turning it into $500, and it’s even reasonable and understandable that your expenses cannot all be round figures. This saves you from avoidable suspicions.
9. Provide additional details when necessary
Sometimes, you would need to clarify some aspects of your tax return, especially regarding some expenses or differences. You might be tempted to assume, for instance, that a potential auditor would understand why your advertising expenses increased or decreased by a certain percentage. But that’s not the way to go.
You should rather provide a detailed explanation of what happened, and this can be achieved in form of additional paperwork or just a cover letter attached to your return. In this case, you may have to send your return via mail rather than through electronic means. The benefit of giving the extra details? It simply saves you from possible probing that could come your way. In many cases in fact, the IRS expects that you provide a written statement explaining your business expenses.
10. Make your foreign accounts known
You probably have a foreign account or even more than one. Well, there’s nothing illegal about it. But then, people tend to deem it unnecessary to report their foreign accounts to the IRS. What they don’t know is that they might be calling for an audit that way. As such, it is essential to understand that filing an 8939 form is obligatory as long as your foreign financial assets have exceeded the IRS-stipulated limits for the given tax year.
However, if after you’ve done all these you still receive a letter from the IRS on an IRS Audit, don’t be afraid. Respond to the IRS Audit within the required deadline, which is typically 30 days, and make sure you provide all required documentation. Follow-up on your response with a call on the provided phone number on the Audit letter and be cooperative and polite. Remember at the end of the day its people that are performing the audit and avoiding giving a negative impression could go a long way. Visit the agency web page and get the information needed to get yourself prepared. You can as well consult a tax professional, especially if a lot of money is involved.