It’s safe to say that no one wants to be audited. It produces anxiety and can waste time and resources. A variety of issues can trigger one, such as mistakes on tax returns. Getting audited is rare, but it’s best to avoid it if you can. Here are a few steps you can take to try to avoid an audit.
1. Operate Honestly and Ethically
Sometimes disgruntled former employees or even ex-husbands and wives will use the whistleblower system to attempt to exact vengeance on you and your company. Other times, investors or the public may suspect fraudulent practices or other unethical behavior. This can result in an independent external audit. It’s vital that companies maintain honest and forthcoming practices, especially in this digital age when information is both easily spread and easy to verify.
2. Check and Double Check
When filling out tax returns, double check everything, especially your numbers. Even if you had an accountant prepare your return, be sure to double check everything. It never hurts to have another set of eyes! Also, always mark everything, even if it’s a dash or zero. Be sure to include all tax forms before submitting your returns: data from a side job (that 1099-MISC), interest (1099-INT) or dividends (1099-INT). Finally, don’t forget to sign your tax returns. Double checking before you send will also help you avoid sending an amendment. Amended returns may draw a red flag because they potentially indicate something else may be off or unreported on your original return. Showing that you’ve carefully gone over everything before you submit will go a long way toward helping you avoid an audit.
3. Accurately Report Numbers
When reporting deductions, you can round to the nearest dollar, but avoid rounding up to the nearest hundred or thousand on your returns. Furthermore, it’s easy to under-report income, especially if you’ve done a small job for cash or a check. While sometimes this can slip under the IRS’ radar, if you’re audited they will have access to your bank account statements.
4. Become an Inc. or LLC
If you’re self-employed or a small business owner, you’re more likely to be audited than a large corporation. One way to have less of a chance to be audited is to become incorporated or become an limited liability company (LLC). In doing so, you’ll be able to record more deductions on your tax forms.
5. Be a Hoarder
Keep your receipts for everything that you’ll record as a business expense. Be sure to have a great system of organization instead of a pile in a closet that no one should ever enter unless they want a thousand paper cuts. Keep receipts anywhere between 18 months and three years, in case of an audit.
6. Claim Dependents Correctly
For your personal taxes, you might want to claim your child who is away at college. But your child may not claim being a dependent. This is something you’ll want to figure out together before the IRS comes knocking at your door. A dependent must also have a Social Security Number, which means you can’t claim your pets.
7. Claim Only Relevant Home Office Expenses
Remodeling your home kitchen doesn’t count towards your home office operations, unless you’re a caterer or a bed and breakfast. Deduct expenses pertinent to your business only. If you do claim any home office repairs, take before and after photos of your office.
8. Explain Large Expenses
Your company recently refreshed the brand or had to make major structural repairs. When recording these as deductions, it will stand out. Write a note to explain such a large number so that the IRS understands why it’s a deduction.
9. Track Charitable Donations
When you donate items to charity, such as cars or clothes, you can make a tax deduction. This is tricky because it’s up to you to record the worth of the items. Appraise your donations between 1% and 30% of their original price. Consider an appraiser’s letter when it’s not required below the $5,000 donation amount. You can also use the willing-buyer-willing-seller test. Check out what your donated items are selling for on e-bay or Craigslist. IF you’ve increased your charitable donations this year, add a note to your deduction. Perhaps you’ve decided to sponsor a cause this year to increase awareness.
10. Hire an Accountant
Hiring an accountant is the surest way to help you avoid an audit. An accountant’s guidance and expertise during year-round operations will add extra benefits, including efficiency and precision in your company. “Think of an accountant as a long-term partner who is invested in your business and cares to keep it fiscally sound,” Amy Vetter writes.
While these are the best ways to avoid an audit, it’s never a 100% guarantee that you won’t be audited. If you are one of the few audited, it’s likely you won’t be the following year. The best thing is to not worry too much about it if you’re thorough and take precautions.