Are you a target for an IRS Audit? There’s no sure way to avoid an IRS audit of your tax returns but there are ways you can lower your chances of being targeted.
Tax audits are rare, but they do happen and can be very expensive. And not to scare anyone, but it has been reported that especially for small businesses, 2020 tax audits are expected to increase by 50%. This is mainly due to COVID-19 and the government programs that were created to help small businesses, like the Paycheck Protection Program. The government pumped so much money into the economy and it has to recover as much of it as it can, so tax audits could be a very profitable area to exploit.
The key to avoiding a tax audit is to first and foremost be honest but also be accurate. Something as simple as entering an incorrect social security number or misspelling your name can trigger an audit but it has to be worth enough for the IRS to care about it.
So what are the red flags that lead to IRS audits?
Here Are Some Common Triggers:
Incomplete Returns or Inaccuracy. Mathematical errors and messy returns can raise red flags.
Unreported Income. All dividends, interest and “other” income must be reported. Failing to report any miscellaneous income will raise a red flag.
Excessive Charitable Contributions. Save your receipts for every donation that you make! Too much charity can raise a red flag, especially if it is not in line with your income or out of proportion with last year’s tax return.
Self Employment. The IRS keeps a close eye on small business owners mainly because there are a handful of people that use this as a way to write off personal expenses. No doubt that you should take every deduction you are qualified to take, just as long as you have supporting documentation.
High Deductions. The more itemizations that you have, the more likely you are to be audited. Don’t mix personal and business deductions. Make sure that your business expenses are accurate and aren’t overstated.
Officer and Employee Salaries that don’t comport to overall revenue, income and profitability.
Inventory values that are out of sync with sales volume or which haven’t changed much over time (especially compared to prior year tax returns).
Low Gross Profit Margins in a business could be indicative of multiple irregularities in the accounting department.
There are other audit flags, but it’s important to recognize that not all imprecise tax returns lead to actual audits. FYI, the IRS randomly selects a certain number of people to audit each year. So it could just be your lucky day! Or not. Otherwise, most tax returns are done electronically and the computer could pick something up to be further reviewed by an IRS employee.
Here Are Some Other Recommended Tips:
File Electronically. Not only is it convenient, safer and faster but by using the built-in tools, the computer will pick up any errors and mis-information and prompt you to make the correction. Plus, it takes the IRS longer to process mail-in refunds.
File Your Tax Returns on Time. Even if you don’t have income to report or don’t owe anything, file a tax return. If the IRS doesn’t hear from you, meaning you don’t file a tax return, it is a sure way to be flagged for an audit.
Don’t Be Dishonest. It’s okay to have deductions and you are 100% entitled to each and every one of them, but if you are stretching the truth, be ready to validate and support those claims with receipts or other documentation.
Hire a CPA or Tax Professional. Tax professionals know the ins and outs of taxes. They can save you time and money, answer questions and resolve issues. Plus, if you are audited, CPAs can represent you before the IRS!
For a limited time, Blieden CPA is offering a FREE year-over-year review of your prior year tax return, income statement and balance sheet to discover indicators and discrepancies that might trigger an audit.
Audits aren’t as scary as they sound. If you are facing an audit, hire a CPA or Tax Professional to represent you. At Blieden CPA, we not only handle tax planning and filing, we are experts in working with the IRS on tax audits. With years of auditing experience, we have a deep understanding of tax law and the audit process, and can coach you on what to say and do.
Based in Arcadia, California and serving all of Southern California, please call Norm Blieden, CPA. (626) 440-9511. Or visit bliedencpa.com for a complete list of services and other important accounting and financially focused insights.