What is an audit and why do individuals cringe at the word? The Internal Revenue Service issues audits as a regulatory measure to ensure that society is completing accurate tax returns. Sometimes they are issued simply to check on something that seems awkward or you might get picked for an audit simply because your number was picked. Avoiding an audit or decreasing your chance for an audit is quite easy.
First to avoid tax deductions, claim tax deductions that you are legally entitled to. If there are items that you are not sure about consult a tax attorney or tax professional – get legal advice about what specific deductions you are able to claim. If you do not have documentation to verify the claim of a deduction it is probably not a grand idea to go ahead and make the claim. Submitting documentation along with your return will assist in preventing red flags and avoiding tax audits.
The discrimination index function is a computer ran program that aids the Internal Revenue Service. Basically, your tax return is compared to the tax returns in the same income bracket. If any deductions or claims seem outrageous compared to others in your tax bracket – your tax return might be flagged for an audit. To help in avoiding a tax audit keep honest on your tax return and do not exaggerate any numbers. When ran through the discrimination index function you want your return to show up normal comparisons.
There are many things you can do to avoid tax audits. For example, first and foremost, keep track of all of your income. Keep copies of your W2’s and 1099 forms, all receipts and any financial information that is relevant to the information submitted on the tax return. Keep all of this information organized, categorized and separated into specific years. Also, if you had help in preparing your return keep track of the contact information of the preparer that assisted you on the tax return. All of these above mentioned tips might not completely help you to avoid a tax audit but would surely be of help if you were chosen for an audit.
If you claim deductions instead of taking the standard deduction, any itemized listings that are exceptionally high for your income range might alert your return for an audit. To avoid a tax audit, keep honest and accurate with all of your charitable contributions especially. For example, please do not state that you have contributed $15,000 to a special organization if your annual income is only $35,000. This is not an action that someone would take it they are trying to avoid a tax audit.
It you are an owner or partner in a small business it would be in your best interest to try and avoid a tax audit. Filing a schedule C, which is required of small businesses, is tricky and complicated. If you are unfamiliar with taxes you should consult a tax attorney or tax professional. Avoiding a tax audit if you are a small business is almost next to impossible. The Internal Revenue Service is fairly certain mainly self-employed individuals try to hide or not report some of their income – this makes small business owners a target for tax audits.
Along the same lines of being self-employed, many individuals that receive a portion or all of their money in cash profits are a target for tax audits as well. To help avoid tax audits, be sure to keep all records of income either in a log book or computer program. Remember to report all income to the Internal Revenue Service and if your income is not currently taxed be sure to pay estimated taxes. These are also easy ways to avoid a tax audit.
If you are divorced both parties of the divorces wave a red flag for a tax audit the first few years. Be sure that you and your ex-spouse know which individual is claiming any dependent/s in the relationship. A child can only be claimed by one parent or the other. Many divorced couples work out a situation as to where the claiming years alternate. Also, if you are not in constant contact with your ex-spouse – be sure around tax season each individual knows who is claiming the dependent/s.
If you hold money or investments in off-shore or foreign accounts it is your responsibility to report the money produced and pay the appropriate taxes required for the funds. Holding off-shore accounts is legal but the taxes must be paid on them. If an individual does not report this off-shore income for any reason at all, criminal punishment can result.
The bottom line in avoiding a tax audit is simply being honest, accurate and filing in a timely manner. Keep organized and consult professional assistance whenever needed, especially if you have a specifically difficult filing situation.