Avoiding an Income Tax Audit
By FindLaw Staff | Legally reviewed by John Devendorf, Esq. | Last reviewed December 09, 2021
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If filing taxes wasn't hard enough, taxpayers also face the possibility of an income tax audit by the Internal Revenue Service (IRS). Tax returns may be chosen for an audit because they raise red flags, are randomly selected, are part of a target group (and thus subject to more scrutiny), or a combination of the above. You cannot be guaranteed that doing all the right things on a tax return will make sure you can avoid an income tax audit.
While there's no guarantee against an IRS audit, there are strategies you can employ to reduce your chances of receiving the dreaded Notice of Audit. Here are some mistakes — some obvious, others less so — to avoid when working on your tax return. Above all else, be honest about what you put on your tax return and submit it properly to avoid fraud.
Common Mistakes That Risk a Tax Audit
Some common mistakes and red flags which attract IRS attention for an income tax audit include:
- Math errors: One of the most common errors is also the easiest to fix. Don't expect the IRS to understand that the reason you think you don't owe taxes is that you made a math mistake. Double and triple-check your figures. Online tax return services like TurboTax and Tax Act are useful in avoiding such errors.
- Omitting income: Another error that points the IRS in your direction is omitting income. Even omitting a small amount may trigger IRS interest, so be sure to collect all your documentation from stocks, bonds, interest-bearing accounts, etc. This is especially true for those making over $100,000. The IRS targets those making over this amount who do not file a tax return.
- Claiming false business expenses: People will often use business funds to pay for personal purposes. If you characterize personal use as a business expense, then the IRS may view it as failing to report additional income.
- Incorrectly filing returns as "self-employed" (Schedule C filers): Self-employed filing is an easy target for the IRS. Because of the ready potential for hiding income by making it look like a business loss, the IRS always has its eyes out for Schedule Cs that show a loss. The IRS knows how tempting and simple it is to make personal expenses look like business expenses on a Schedule C, and pays appropriate attention.
- Talking too much: If you do choose to scam the IRS, you can be caught by anyone willing to tip off the IRS to your illegal activities. Most audits are triggered by computer algorithms but others come from whistleblowers. Whistleblowers can even receive a percentage of the tax collected based on the tip.
- Filing an incongruent return when part of a target group: The IRS looks for incongruent returns from the self-employed, small businesses, and those who make over $100,000. The IRS also targets tax returns that are disproportionate to returns from others with a similar income, location, profession, and family size. For example, if you claim a family of six and live in a home in Beverly Hills but only claim income of $25,000, the IRS may investigate your tax situation.
Some of the "red flags" from above can't be helped. If you're a small business, you have to file as a small business. If you are self-employed, you file as self-employed. Just be prepared if the IRS does tap you on the shoulder for an income tax audit. However, it helps to have an advocate on your side to deal with the IRS so you can get back to business. Talk to a tax attorney if you receive notice of an audit.
Staying Off the IRS Radar
You can avoid a lot of problems by preparing your taxes on a computer. The IRS favors computer-processed returns because they are clear and are less likely to have math errors. If you can't use a computer, print carefully. There's nothing like a sloppily written return to draw attention.
In addition to avoiding the above mistakes and red flags, you should consider hiring a bookkeeper to make sure receivables, credits, and debits are all in order. This is especially true for small businesses. Unless you have a very straightforward tax return, you should also consider hiring a tax professional to handle your tax return. Tax preparation software has limitations.
And finally, always file your taxes on time. If you owe money and can't afford the entire payment, pay what you can so the IRS records receipt of payment (the payment also indicates good faith on your part). Filing a tax return extension only extends the deadline to file your taxes, not the deadline to pay them. If you file on time and send some payment, you can save on IRS late payment penalties. So do yourself a favor and file and pay at least a portion of what you owe on time.
Receiving a Notice of an Income Tax Audit
If you do happen to be audited, don't panic. If you have all your documentation and make the proper calculations, deductions, and write-offs, you'll be fine and the IRS should end the investigation quickly. An audit is simply the IRS asking you to prove the numbers on your return.
There are three types of income tax audits:
- Correspondence audits
- Field audits
- In-office audits
A correspondence audit is the most common type and generally the most simple to deal with. It usually involves the IRS taking note of a correction (their gentle word for "error") on your return with a notice to either pay more or clarify by providing them with more information.
A field audit typically happens for businesses and not individuals and involves a team of IRS auditors going on-site to the business and inspecting their books and documentation. An in-office audit is conducted in the IRS office and requires the business or individual to prove their tax return is true and correct.
For an audit, especially anything above a correspondence audit, you should consult a tax professional who can guide you through the process and prepare you for the audit. For field and in-office audits, think of the income tax audit as a trial. You will likely want someone to represent you when dealing with the IRS. Get a tax professional to assist your case.
Avoid a Tax Audit: Talk to a Tax Attorney Today
Whether you are currently facing an audit, or are eager to ensure that one doesn't happen in the future, a lawyer can help guide you through the labyrinth of the tax code. A lawyer will also handle many of the communications with the IRS, which can help eliminate a lot of the stress of an audit. Contact a local tax law attorney today and learn how they can help.
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