How to Reduce the Risk of an IRS Audit
Most IRS Audits Are Avoidable
Few things strike fear into a person’s heart like the thought of an IRS audit. People harbor this fear, not simply because of the money that they may end up having to pay the government, but also because an audit can lead to a loss of property or even jail time. It can even lead to an extreme need for instant cash, like taking out multiple payday loans. While most people are honest and diligent in accurately reporting tax information, for those who are not, this nightmare can easily become a reality.
By avoiding the following activities, a person might also avoid an IRS audit:
A Return Filled With Errors
The easiest way to raise questions about a tax return is to overlook mathematical errors, careless mistakes or by forgetting to include important information. While this seems easy enough to avoid, many don’t take the time to double check their returns to be sure that the information is accurate and that it makes sense. By not doing so, unwanted attention is drawn to their tax return, which sometimes prompts an IRS audit.
Reporting an Extremely Low Income
Each job or career has an expected income level associated with it. When a person is working in a particular field yet reporting a salary that is far less than expected, this can prompt an audit. Although some people may actually earn less than others in the same field for any number of reasons, such can still raise suspicions and prompt an IRS audit. This is particularly true when an uncharacteristically low income is reported several years in a row.
Not Reporting All Income Earned
Many understand the importance of having multiple streams of income. However, people who work more than one job or those who provide freelance services must be especially careful about reporting all of their earnings. Not reporting every source of income and the amounts earned raises a serious red flag that may prompt an IRS audit. Each employer reports every employee’s income to the IRS, as do companies who pay for the services of certain 1099 workers. Therefore, the IRS knows how much money most people have earned even before the information is officially reported on a tax return. To fail to provide information on additional income will almost certainly result in an audit.
State Tax Returns Do Not Match Federal Tax Returns
Taxpayers are required to file separate returns for their state and federal taxes. When information filed on these returns does not match, an IRS audit may be the consequence. Again, it is very important to pay attention to all of the details provided in a tax return; check for errors and make sure that all information matches before a return is submitted.
Not Filing a Tax Return
Many claim to have found loopholes in the law that makes it possible to escape paying taxes. Others, who feel that income tax laws are unfairly imposed, outright refuse to file returns as a form of protest. People who do not file, however, do so at their own risk. Refusing to file a tax return is one of the fastest and easiest ways to encourage an audit.
While most people are never faced with an IRS audit, those who are find it to be a daunting experience. Whether the faulty reporting that led to an audit was part of an honest error or was a deliberate attempt at defrauding the IRS, few people get away with inaccurate reporting. By filing early, obtaining the help of a professional and paying close attention to detail, however, an IRS audit can be avoided.