According to the IRS, two groups of people are more likely to get audited than any other — the rich and the poor. Most moderate-income earners tend to pay their taxes and follow best practices.
If you don't belong to these two groups, the odds are that you may never hear from the IRS. But then, it's still a good idea to know why people get audited and how to avoid it. That's what this article will address.
Understand how the IRS selects people to be audited.
America has over 143 million taxpayers. No IRS official is going to sit at a computer reviewing the tax information for each one. Instead, they use software to look for red flags, like how many deductions a person claims compared to others in their income bracket.
This doesn't mean you shouldn't claim the deductions owed to you. You just need to have the proper documentation to back them up.
Consider incorporating your small business.
Small businesses are also more likely to receive an audit than large enterprises. Filing a Schedule C form could raise some red flags when you file as a self-employed individual.
Lower your chances of getting audited by incorporating your business. Besides the reduced probability of an audit, you'll also be eligible for certain deductions. Note that incorporating your business can generate many expenses for you, so make sure it's worth it before moving forward. If you need help, you can refer to this source. They offer excellent business incorporation services.
Besides documenting everything, you should also have a reasonable explanation. Did you record more charitable donations this year than last? Why? Events like these tend to raise red flags at the IRS, but adequate receipts, worksheets, and even canceled checks can save you.
It also helps to know what the IRS looks out for when auditing. Some of the common red flags are bad debts, home office deductions, and other business deductions. Document properly, and you’ll be safe.
File at the right time.
Sometimes, timing is everything. Many tax advisors claim that the IRS selects tax returns to be audited by the extension deadline in October. The later you file, the lower the odds that you’ll be among the unlucky bunch. However, there are a few conditions.
If you claim unreasonable deductions, it doesn't matter when you file; the IRS will notice. Also, if you owe some taxes, it's advisable to file as quickly as you can. Even if you're unable to pay the full amount, a small check along with your returns can show good faith.
Check for errors on your return.
If you're a mathematician or accountant, then you probably trust all your tax return entries. Otherwise, you should double-check everything, including name spellings, your social security number, and of course, your math.
Sometimes, the IRS will make corrections for you if the errors are minor. Simple mistakes like bad math, misspelling your name and omitting unimportant columns will be fixed. You'll also get a letter highlighting your mistakes and recommending likely steps you can take.