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How to Avoid a Tax Audit
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Apr 2010
April 15th is right around the corner and we all know what that means: tax time. For many, the worst fear about taxes isn’t filling out the paperwork or paying what’s owed, it’s being audited by the IRS. So what can you do to stay off the radar? As you gather paperwork and prepare to file your personal or business taxes, keep these tips in mind to help you avoid an IRS audit.
Beware Disgruntled Employees, Exes & Neighbors
The IRS has been getting a lot of press about their whistle-blower program for good reason. It works. Informants are paid a minimum of 15% and a maximum of 30% of the amount owed by businesses or individuals. Bill Raabe, a tax expert at Ohio State University is quoted in CNNMoney as saying, “You’ll have spouses—or ex-spouses probably, as well as ex-employees turning in their employers.”
In 2008 alone, the IRS received 476 tips identifying 1,246 questionable taxpayers, according to the article. “Many claims are for substantially more than the $2 million threshold and involve business or wealthy individuals,” IRS Whistleblower Office director Stephen Whitlock is quoted as saying.
Your best bet? Keep your taxes legitimate and your tax information private.
Deductions
In general, you probably want to avoid deducting anything out of the ordinary, like claiming use of your entire house as a home office. And while they may feel like family, pets are not legal dependants as each dependant must have a valid Social Security Number.
Another way to avoid an audit is ensuring you don’t deduct the same expense on different forms. And if there is a deduction that you think may stand out, such as a large amount spent on building repairs, offer an explanation if possible.
Prove It
In terms of paperwork and documentation, do you have a record of everything? On top of IRS forms and summary reports, you’ll need to substantiate deductions. This means receipts, copies of checks or other documentation that proves a deduction was a business expense.
For business expenses, the magic dollar amount is $75. If the expense is less than $75, a simple notation somewhere will be enough substantiation. However, if the expense is higher than $75, a more detailed piece of evidence is needed, such as a receipt.
Do the Math
Check your math and cross reference numbers. Does the amount of income on one form match the number on another form or a supporting document? While the IRS system corrects some minor errors, providing correct numbers and calculations is up to you.
Plan Ahead
The IRS says it can audit you up to three years after filing your taxes, though Schnepper says most audits are conducted within 18 months of filing taxes. A lot can happen in that time, so think about how you can plan ahead. This may include saving all expense receipts, logging the miles you drive for business expenses, or taking a photo of the space you claim as a home office.
The Professionals
Lastly, consider the services of a tax professional. They know what they’re doing and can point out elements of your tax return that may get flagged for an audit. Plus, should you get audited you can look to them for help in putting together your case.
There is one bit of good news if you are selected for an audit--according to the IRS, this reduces your chances of being audited again the following year.
For more information please visit:
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Comments
Submitted by on Mar 22, 2010 - 3:29PM
I put every business expense on my Business AMX card so I don't have to track and maintain receipts. Is this acceptable documentation?
Submitted by on Feb 1, 2011 - 6:49AM
No:
A business partner of mine was denied a deduction for an airline ticket on her Amex because she did not have a printed receipt.
It was not a question of whether the ticket was a business or personal expense but rather lack of receipt.
Submitted by on Mar 22, 2010 - 5:33PM
Watch schedule C business deductions. If you have a small business consider forming a sub chapter S corporation. There is always of suspicion that business deductions on schedule C are mixed with personal expenses.
A sub chapter S corporation is clean and you can have a separate bank account for it. You issue yourself a K-1 with any profit or loss and it goes on one line on the 1040.
I have been doing this for 10 years no with no audits of my sub chapter S corporation.
Submitted by on Mar 27, 2010 - 6:03AM
Depends on the business as to whether an S-Corp will work or not. The S-corp gives you a seperate Taxpayer Identification number (TIN) known as an EIN. Your SSN is also a TIN. If you are an insurance agent, broker, or other professional working for one or more companies, they usually issue a 1099 with your SSN. Very few will pay you as an individual on an EIN. The added overhead in terms of licensing, bureuacracy, insurance, asset tracking, and so forth generally do not payoff unless you have a large volume of sales. At the same time, using a Form 2106 (Unreimbursed Employee expenses) for legitimate expenses incurred during the course of business leaves way too much money on the table because 2106 expenses go on Schedule A, which is "below the line" where as schedule C expenses come right out of your gross receipts.
As noted in the article, you expenses need to be legitimate and well documented. I would also say that you expenses should be reasonable consistant in natures from year to year unless there's an obvious reason for it.
I have an S-Corp for liability purposes and I file schedule C for my spouse because of how she is paid.
I would seriously reccomend that you maintain receipts in addition to the AMX statements for a variety of reasons. Chiefly, the statement doesn't necessarily prove what you purchased should that come in to question. Also as silly as this sounds, I keep weekly expense reports for all of my purchases and travel, it keeps the documentation in order and correlated with what was being done at the time.
One last thing to keep in mind is that internally, the IRS has a threshold for Meals & Entertainment expenses that is a percentage of gross receipts or gross profit (I believe.) If you exceed that, you're asking for scrutiny. AT the same time if you can prove it it doesn't matter. I try to use the IRS Per Diem values for for M&E expenses - which is why I use the expense reports as noted above.
Good luck!!
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