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IRS Audit - Tips to Avoid an Audit by the IRS

Tips to Avoid an IRS Audit

Last Updated: March 17, 2014

According to a recent article in MoneyTalks, fewer than 1 percent of tax returns are audited, which is good news for the 99 percenters but what about that 1 percent that does get audited? It would be nice if we knew how and why those files are picked to be audited but you know the IRS will never release that kind of information to the general public. So, what can you do to prepare yourself incase you are audited? We have some helpful tips for you in this article.

Keep Your Records in an Orderly and Organized Manner

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.

File Your Tax Returns Early

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.

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