Are you afraid of the possibility of an IRS audit? You’re not alone. While it’s actually common for many business owners to be audited fairly regularly, receiving an IRS audit letter can still evoke fear like nothing else. The good news is that the odds of avoiding an audit are in your favor. And if you are audited, it isn’t usually a problem (as long as you’ve reported your information correctly).
Your best weapon is to understand factors that increase your chances of a tax audit, use properly structured legal entities, and then take steps to stay under the IRS’ radar.
According to Kiplinger, here are some strategies to avoid drawing unwanted attention:
- The IRS gets copies of your 1099s and W-2s, so if the income on your return doesn’t match their records, you could get an unwelcome letter. Bottom line: report all taxable income.
- You might get audited if your charitable deductions are too large in comparison to your income.
- If you claim a home office deduction, make sure the space is used solely for work purposes on a regular basis.
- Are you claiming rental losses? Know that the IRS takes a close look at rental losses written off by taxpayers, especially when a person’s adjusted gross income exceeds the IRS guidelines established for this deduction.
- If you deduct business meals, keep detailed records to document your expenses (whether you’re an employee or self-employed).
- Thinking about claiming 100% use of a business vehicle? This raises a red flag if you don’t have a second vehicle for personal use.
- To write off a loss for a hobby activity, you must conduct the business with the expectation of making money.
- Avoid running a cash business. Legal structures are more formal and actually drop your chances of an audit. The IRS knows that cash businesses are prone to report less income than they actually earn.
- Failure to report a foreign bank account can result in huge penalties. As a heads up, catching these tax evaders is a top initiative for the IRS.
- Don’t take extraordinary deductions unless you have documentation to back it up. As long as your paperwork is in order, you don’t have anything to worry about.
Don’t let fear stop you from taking the legal deductions available to you.