United States is under massive Debt and those days are not that far in the future when our Federal Government will be under pressure to generate additional revenue by increasing Audits. Audits will most likely focus on individual who are small business owners and individual taxpayers who are in high income or have rental real estates. In this article we will share some ideas and strategies that will help you learn How to Avoid and IRS Audit.
If you are a small business owner who doesn’t have all the receipts and records, learn these important strategies that will help you Avoid getting Audited by the IRS?
We have put together a list of things you can do to avoid an IRS Audit.
Don’t Use problem tax preparers
Many audits result when the IRS deems a Tax Return preparer is preparing fraudulent returns either intentionally or due to lack of knowledge.
Per IRS Guidelines “Tax fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients”.
The IRS highly recommends using preparers who are ethical and competent. Here is a link from the IRS website where you can find competent tax preparers and see their credentials. Here is link for IRS Tax Preparer Directory.
Don’t make calculation mistakes on your Tax Return
Many Returns are audited as a result of mistakes on the Tax return. Either due to missing income or calculation mistakes. It’s highly recommended that you use either a competent and experience tax preparer, or a software such as Tax Act or TurboTax
Don’t report large business loss against your W2 income
Many tax payers end up setting up small businesses while they work at their main job.
Since they are just starting a business many times they have alot of expenses and very little income. As result of that many tax payers have huge loss on their Schedule C business Tax return against their W2 income.
The IRS frequently audits such returns. If you like to avoid going though an audit, avoid taken large losses against your income.
Don’t Amend your return, unless you have to
Amended returns are usually reviewed by IRS personnel very carefully hence, your chance of getting an audit is extremely high.
Ideally you want to avoid amending returns unless you made a mistake or forgot to include any income. If you have to amend a return, use a qualified tax professional.
Don’t take Excess Deductions
Be very careful when you are taking deductions such as business expenses, Charity and medical expenses.
The IRS typically compares your income and deductions to others at the same time and sees if you are within a bell curve or not.
If you are claiming extremely high deductions, it’s highly likely that you will get audited. Make sure you keep all your receipts for business expenses and charity donations.
If you are a S Corp Shareholder and perform work within the S Corp, then you are required to take reasonable Salary from S Corp. You need to Run Payroll from your S Corp for yourself just like an employee(w2) and file 941 & 940 and pay your payroll taxes.
You need to pay yourself salary that you will pay someone else if they were to do exactly what you do. This is market rate for the position you hold in the company and type of work you perform.
We have seen recently rise in audits for S Corps for shareholders that do not take reasonable salary at all or take very small salary.
How Long Should I keep my Tax Records
Navjeet Chahal, EA