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Tips on How to Avoid an IRS Audit

Last Updated: March 5, 2009

The Internal Revenue Service (IRS) is said to be processing about a hundred million tax returns yearly. Of that lot, less than 2% or fewer than two million returns are subjected to review and audit. If you haven't experienced an audit by the IRS, then you should know about its inconvenience and related costs. It can unduly burden you and your business so you should take every step possible to avoid an IRS audit. Here's how you can do so. (Note: this article was written with businesses in mind, but the same tips apply to individuals.)

Errors and discrepancies in your tax returns, no matter how minor, are like open invitations for an IRS audit. Therefore, you would want to minimize, if not avoid, making any errors when you're preparing and filing your returns. To increase your accuracy, use a systematic method of keeping your records so that they are in order and well organized. Be sure to compile all pertinent receipts and documents related to your business transactions.

And even if the IRS eventually inspects your business, your orderly records will come handy when you have to answer questions and support your deductions. The IRS will need to compare and verify your claims as against the actual documents like canceled checks and receipts so you must have them on an easily accessible file.

Hire a Professional Accountant

Even if you are operating only a small business, it pays to hire a professional accountant who can provide you a buffer from the IRS. Even if you have to pay the professional fees, it will still be cost-effective on your part compared to the time you consumed by an IRS audit. Try to appreciate the fact that filing a tax return is not easy and simple. You will need to comply with particular legal requirements when accounting for your business. If you don't have the necessary academic preparation and related experience, it's best to let the professional do the job for you.

Have a Separate Bank Account for Your Business

Your return could be selected for an IRS audit if there is any discrepancy between the amount you reported as business income and the balance reflected in your bank deposits. This usually happens when you use the same bank account for both your business and personal use. Say you have a large bank deposit because of an inheritance and since this will not reckon with your business income, the IRS would assume that it is something irregular that must be audited. Thus, keep your personal money separate from your business funds to avoid eliciting the curiosity of the IRS. Keep them in separate bank accounts.

Early Filing and Electronic Filing of Taxes

There is an advantage to filing your tax returns early. IRS audits are sometimes focused on those who file late. Even with early filing, however, make sure that your tax reports are accurate and correct. Any error is bound to be noticed by the IRS regardless of how early you file your return. And, you may want to file electronic returns. By filing online, you get to record your returns directly onto the database bypassing the scrutiny of tax clerks.

Furthermore, electronic filing eliminates many of the errors and wrong computations that are common in the manual preparation of tax returns. Remember that once the IRS sees any error of whatever nature, the IRS is likely to check your tax report further to find if there are many other errors in it.

So to sum it up, you can avoid an IRS audit by using an orderly and organized record keeping system. Also, make sure that all your entries and computations are accurate and error-free so your return will not call any attention.