How can you avoid a tax audit?

Chad Bice | February 10th, 2011

There really is no way to totally prevent an IRS audit of your business income tax return. However, there are things you can do to lessen the chances. Here are a few tips published recently by the Wall Street Journal.

–          Choose your tax preparer carefully. The IRS has stepped up its efforts to review paid tax preparers. The IRS notes that more than 60 percent of individuals and even more businesses use a paid preparer. If your preparer processes your return incorrectly or fraudulently by, for example, claiming unwarranted deductions, more of that preparer’s clients may be audited.

–          Report all income. With today’s electronic records, the IRS can quickly cross-reference W-2s, 1099’s and other sources to make sure income information matches the return. When the information doesn’t match, the return faces an automatic audit.

–          Provide complete information. Be sure to answer all of the questions and provide all of the forms, schedules or other information necessary for your return. When information is missing, it can trigger a more extensive review of the return.

–          Try to avoid those ‘triggering’ deductions. Although the IRS won’t tell you which deductions can trigger an audit, some past deductions that were often questioned included the home-office deduction and sole proprietor deductions against revenue. If you need to claim the deductions, just be prepared to provide documentation if your return is questioned.

–          Details, details, details. Something as simple as a math error or an incorrect Social Security or tax identification number can trigger a more detailed review of your return. Such errors account for less than one percent of entries filed electronically, but about 20 percent of paper returns.

The IRS performs random audits from time to time, so literally any tax return could be selected for a review. You can be prepared by keeping good records for your business activities, retaining required receipts and documentation and using separate bank accounts and credit cards for your business and personal activities. You’ll want to retain your records for a minimum of three years.

To see the complete list of tips in the Wall Street Journal article, you can visit this web page.

Share Button

Tags: , , ,

Leave a Reply