Tips to Avoid A Tax Audit

The following article is a guest post by Matt Robinson, a tax preparer and accountant at Tax Debt Help, LLC.

Very few tax audits are a result of mathematical mistakes made on your tax return. The IRS runs every tax return through computers that automatically correct any mathematical errors, and check for incorrect deduction amounts. A common tax deduction error that the Internal Revenue Service computers can find is when people deduct 100% of medical expenses. You’re only allowed to deduct the amount of medical expenses which is 7.5% of your adjusted gross income. IRS computers will also compare your deductions to other people in the same tax bracket using a secret formula, called the DIF Score. Tax returns that have the highest probability of generating more income will then be targeted for a tax audit.

If you’d like to reduce your risk of a tax audit, here are a few tips for what to look out for and what to avoid:

Avoid Offshore Accounts

The IRS believes that US taxpayers have managed to hide billions of dollars in bank accounts and investments in other countries, with the majority of income from these accounts going unreported. Anyone with an offshore bank account, and particularly those with credit cards or debit cards attached to the account, are on the IRS target list for audits. Avoiding offshore accounts all together will limit your risk of being audited.

Watch Your Business Expenses

Don’t try to reduce your personal expenses by labeling them a business expense. The only time you can legally deduct business expenses on a tax return is if you’re actually in business, looking to earn a profit, and have actual expenses related to running that business. Many people find themselves audited for claiming business expenses ? make sure you have adequate records and documentation to back up any expense you list as a business deduction.

People who are self-employed are a higher target for tax audits because they have more opportunities to convert personal expenses into business expenses, or otherwise hide some of their income.

Auto, Travel, Meals, Entertainment

These categories of tax deductions are areas where taxpayers often fail to keep the required documentation to prove they are entitled to deduct these expenses. The IRS is aware of this and will target tax returns that deduct for auto expenses, travel, meals and entertainment more than tax returns which do not deduct for these expenses.

To reduce your risks if you are audited due to these categories of deductions keep adequate records and receipts. You need a receipt for any expenses over $75 for meals or entertainment. If it’s under $75, just a diary notation is enough as long as you have the amount paid, the name and location of the entertainment or restaurant, the person entertained and their business relationship with you, and the business discussion held during that entertainment.

If you are audited don’t show up with a shoe box full of receipts. The more organized you are, the easier it is for an IRS agent to see that you have documentation, keep good records, and aren’t looking to avoid paying taxes you owe.

Include Documentation

If you know your tax return is going to include one of the triggers for a tax audit ? such as high medical bills or a large charitable contribution ? you could attach copies of your medical bills or a copy of the check for your charitable contribution. When the IRS computer spits out your return as one needing an audit, those receipts, medical bill statements or check copy may be enough to keep your return from going through a full tax audit.

This article is provided for Taxdebthelp.com, a site designed to help with tax debt. If you are interested in pursuing tax debt settlement, this site can help you figure out what your options are.

Tagged as: IRS, tax audit, tax return, Taxes