It has been said that there are few certainties in life and taxes are one of them. We are positive that getting audited by the IRS is something that we all, with certainty, want to avoid. Some reporting groups say that getting audited is about as half as likely as it would have been ten years ago, however, it definitely still can occur and the IRS’s flagging policies can certainly change at any given time and potentially more American taxpayers will then face audits.
There are some things that you can be aware of that will help you avoid receiving an IRS tax audit notification. You should be aware that no matter what you do, you may not be able to avoid an IRS tax audit simply because the selection process uses a random selection statistical formula.
Understand the “Norms” and the IRS’s Computer Screening Process
The IRS’s statistical formula is driven by a computer screening process that takes tax returns and compares them against typical return norms. If yours does not follow the same typical appearance, then you could be chosen for an audit simply because they appear different. The program that the IRS uses for screening is called the Discriminate Income Function (DIF) and it compares your tax returns with tax returns of other individuals that are in the same income bracket and looks for differences in deductions. However, even with this computer screening, you can still be selected at random, for no real reason.
Understand If your Career or Job is a Top Target
People that work in mostly cash businesses such as consignment, waitresses, bartenders, valets, hairdressers, etc. then you are more than likely to be flagged for an audit. Similarly, doctors, lawyers, and accountants also have a higher statistical chance of being flagged. If you work in one of these types of jobs you should keep meticulous records of all your deductions and be prepared to explain them.
Understand the Drama with Self-Employment Status
Small business owners and those that are self-employed are among the top receivers of IRS audits. If you work for yourself and file a Schedule C, as a self-employed taxpayer then you will statistically have a higher chance for receiving an IRS audit. Incorporating or forming an LLC (limited liability company) will help you reduce your chances of being notified that you have been selected for an IRS audit. It does not hurt that LLC’s and corporations may allow for more deductions. If you do nothing, it is helpful to have a tax professional, or tax attorney that you hire prepare your taxes for you.
Include Extra Materials to Reference Explanations
If you know that your tax return contains some discrepancies and changes from the previous years’ returns then you can acknowledge that and provide additional materials such as forms, spreadsheets, etc. that provide explanation for why things look a little different. What will happen is you may still get flagged by the DIF computer screening process, however after you’ve been flagged a personnel agent may have a chance to look through your return by hand and view the materials and decide that you pass and do not need to receive an audit.
Be Aware of What Can Get You Flagged Most Often
Knowing is most of the battle in this case. If you know what can get your return flagged for an audit most often then you can avoid some of those reasons for being flagged. Typical reasons for receiving a flag for an audit are home office deductions, medical expenses, business travel, meal and entertainment expenses, as well as bad debt expenses and casualty losses. If you are going to use these types of deductions that you are entitled to, then you should have proper documentation of each.
Understand the Best Time to File
Many tax experts say that the later you file, the less the chance that your tax return will get flagged for an IRS Audit. There is also a belief among some that if you file for an extension you are less likely to get an IRS Audit because the returns for the year will be selected prior to the latest extension deadline which is October 15th.
If you are going to do this, you should remember that tax penalties do exist. If you owe taxes you still need to pay something by April 15th. It is advised that you should make small incremental payments with your promptly filed return to show a good faith that you will pay and lower your tax penalties in the future.
Use Proper Math – Check your Calculations
You should always pay careful attention to the math on your forms and in your calculations of the return. Be sure to use a calculator to check your work. If your return is free of mathematical errors then this will help you avoid any red flagging due to miscalculations.
Your State and Federal Tax Returns Should Match
Make sure that your returns match your federal and state forms. Use exact numbers when filling out your return forms, don’t use numbers that have been rounded up.
McCauley Law Offices, P.C. offer IRS audit representation for clients that have been notified of a tax audit. If you have received a tax audit notification you need proper support from an experienced tax attorney that understands the process and what to expect. Give us a call today.
At McCauley Law Offices, P.C., our lawyers will find a solution to your tax problems, no matter how complex your IRS issue is. View our services and contact us (or call 610-388-4474) to schedule a free consultation with one of our tax attorneys. View and purchase Gregory McCauley’s published work “TAXJAMS: Simple Solutions” on Amazon. From our office in Chester County, Pennsylvania, we find tax solutions for clients throughout the country.
