Immediately any taxpayer hears the phrase “Tax audit,” it strikes some fear into their heart. The Internal Revenue Service (IRS) focuses on a particular tax return for any strange pattern when selecting returns for review. If you are contending legitimate deductions, the possibility of avoiding all red flags might be close to zero. Still, you can decrease the risk of paying more taxes and penalties if your return is audited.
All the taxpayers chosen for an audit are mostly less than one percent. But there are various ways to avoid being part of the statistic. Check out the six points discussed below.
File A Schedule C
This is primarily true for sole proprietorships, which make up the bulk of small-scale businesses. Most business owners often have to file a Schedule C tax return audit to report business income as part of their report tax returns. Filing schedule C will show your company’s profit or loss and increases your chances in the more likely to-get-audited stack.
Sincerely, there is little to nothing you can do about this other than ensuring you have the proper documentation to back all the claims or expenses listed in the form.
Document High Deductions
You can be confident that the IRS documents the statistics of what the average person within your age bracket claims for deductions every year. If there is a tremendous difference between your deductions from your peers, your tax return could be chosen. Consider itemizing your deductions as opposed to making standard deductions, which is the common practice.
Be sure you can prove the legitimacy of all your itemized deductions, especially unrefunded business employee expenses. Ensure you claim the total deductions you are entitled to, and your documentation should be in order in case you are to be audited.
Have Stellar Records For Your Cash Business
If you deal with more cash transactions in your business, there is a higher chance that your tax will be audited. The IRS has figured that there is a propensity for cash business owners to “forget” to proclaim some cash income that might otherwise be unreported and focus on these businesses more aggressively. Small eateries, car washes, salons, convenience stores, laundromats, and spas are all more likely to be audited. So, make sure you have a record for the income, expenses, and floating in your cash business.
Take The Opportunity Of Work From Home
The IRS always looks at home offices critically. Be realistic and precise when giving the percentage of your home that’s strictly for business purposes. Be mindful that the space you call the home office should only serve a business purpose.
When you use the office for non-business-related purposes, keep track of the exact time used. Then, you will keep a tab of business hours’ time so that your tax will not be over-calculated and you stay on track.
Don’t Ignore Any Questions
One of the many ways to avoid the IRS red flag is to ensure you answer every question provided for you in the tax form, and it should be an appropriate answer even if the answer is $0. Make sure you don’t omit any relevant line. A careless mistake on your part could get your tax returns unwanted attention.
As much as you need to understand, your odds of getting an audit are close to zero instead of businesses and individuals with earnings in multiple millions to billions of dollars have a higher chance of getting audited. Just don’t leave any space that will allow the IRS to take a second look at your figures. You will save time and stress when you do that.
Use Your Car For Business
This is another aspect that people take advantage of, so most of the time, the IRS gives it a deeper look. If you as a taxpayer claims 100 percent business use for a passenger vehicle, it will earn you extra attention from the examiners. The IRS knows that exclusive business use is not common and mostly not realistic. Besides the cost of commuting, small business owners have the chance to claim business-related auto expenses on their taxes.
Be sure that you have vehicle use logs that are accurate and very recent and prove your business use of the car. And as regards to travel and entertainment, keep a record and possibly calendar entries for each trip, as taking this step will increase your chance of not being audited.
Even after doing all these, you might still try to answer IRS questions. Often, all it takes is to resolve any issue is to provide accurate documentation to back up the figures on your return.
