Ways to Reduce Your Chances of an IRS Audit

Taxes paid to the IRS and state agencies are the number one expense in this country. As tax season rolls around wouldn’t it be nice to avoid any unnecessary confusion and decrease your chances of an audit? To beat the IRS we must first understand the IRS and the process associated with receiving and reviewing our taxes. The following article covers the basics of what you need to know.

After completing your tax return the first location in which it is received is at the local service center, where it is screened for any miscalculations and with all form 1099’s to make sure you didn’t underreport your income. After your returns are screened locally they are then sent to the Martinsburg, West Virginia, center. Here the IRS rates or scores your returns using a computer program known as the Discriminant Function System (DIF). The higher the individual scores the more chance the return has of being immediately examined for any further problems. This step of the process provides a loophole that may help totally avoid an IRS audit. If you put in the effort of attaching schedules or statements explaining any problems, there is a good chance the IRS examiner will move past suspicion of your returns and therefore avoid an audit altogether. Here are seven other great ways to help protect you from being unnecessarily audited:

1. Make sure to file form 8822,”Change of Address,” every time you move.
*It may surprise you to know that every year the IRS wants to send out an estimated $78 million dollars in refunds, but the people have moved without updating and filling form 8822”change of Address”, and the money cannot be sent. If you fail to notify the IRS of any move you make the responsibility of the IRS stays with your old address.

2. Presentation is key!
*It may seem to make sense that if the IRS examiner can’t read your returns they won’t audit them but it is actually just the opposite. By keeping your tax returns neat it creates an impression of attention to detail. Bottom line is that the clearer and neater your taxes are the fewer problems you will experience.

3. Keep all records of ANY expert advice for the IRS.
*If you have ever sought the council of an accountant or a lawyer regarding the IRS make sure to keep records of the date and the advice given and received. There have actually been cases of the IRS waiving penalties because of a good-faith reliance on certain independent experts.

4. Separate your income and large expenses into smaller sections.
*The income you report on your 1099s should be separated from other income altogether. For example, if you earn extra income from home completing surveys online you should report this income separately from your W2 wages. By doing this it helps to ensure that you haven’t underreported any forms of income earned. Also break down your expenses as far as possible in clear detail to explain to the IRS examiner exactly what was involved in the expenses.

5. Report all of your income to the IRS.
*The IRS has many ways to screen for unreported income and it is an art they have mastered so it is unwise to think you can fly under their radar. It is important to file all earned income and the source from which it came. Be clear and give as much detail as possible to reduce your risk of an audit.

6. Use the IRS’s preaddressed label to speed up the processing of your tax return.
*By using this label it speeds up the expedite process.

7. Have your return prepared by a competent tax preparer!
*By completing and filling your own returns the IRS automatically gives you less credibility than an expert lawyer or accountant, therefore increasing your chances of and audit. It makes sense to allow an accountant to prepare your taxes because of the software that they use. The software can significantly reduce any unneeded errors.

You will never get rich until you learn to get your taxes down to the legal minimum. Many self-made millionaires have several things in common. They are frugal and live beneath their means. They know that when it comes to their expenses, a penny saved is a penny earned, and this applies when paying the IRS. You have to reduce the amount of taxes you pay to the absolute legal minimum.

This is also why everyone should have a home based business of some kind, no matter how small. It is now estimated that 40 million people work from home, which represents a 20-fold increase over the last 10 years. The IRS makes a number of tax breaks available to businesses of all sizes, including home based businesses. If you normally work full time for your income, you can easily save yourself $2,000 to $10,000 per year in taxes by starting a small, simple, home based business that you work part time.

The IRS also gives you a tax break if you operate your home based business at a loss. If you can show that your business produced a loss of money in the first year or so, you can use that loss as a deduction from the other income that you made. For example income from wages at your job, pensions, dividends, cash earned taking surveys online, even income your spouse earned if you file a joint return, etc. For example, let’s say you earn $30,000 at your job at Wal-Mart. If you start a home based business that generates a tax loss of $10,000, you will only owe the IRS for income tax on $20,000.

There are ways to make deductions for the money you spend having fun, like golfing or going to the movies, and you can audit proof your records for the Internal Revenue Service (IRS).

Answers To Frequently Asked Tax and Audit Related Questions:

How much can I deduct for business entertainment expenses such as taking a prospect out to dinner or to a baseball game? Answer: Prior to 1987, the IRS and tax laws allowed you to deduct 100 percent of any entertainment cost for you or a prospect. However, as a result of some “tax simplification laws” your entertainment deductions are now normally limited to 50%. If you spend $200 on golf and lunch you can deduct $100.

A very common question is: “Does the IRS require me to keep receipts?” Answer: The IRS only requires you to keep a receipt for entertainment expenses if the expense is over $75. So no receipts are required for everything under $75. However, the IRS loves to see receipts, so it’s a good idea to keep them anyway in case of an audit.