There are no surefire ways to avoid an IRS tax audit. However, there are many red flags that you should be aware of. If you do not have those red flags on your tax return, there is a better chance of avoiding IRS scrutiny.
Find out more about how to avoid IRS tax audits by following the tips below. However, if you have an IRS tax problem, you should discuss the matter with the Chicago IRS attorneys at North Suburban Legal Services immediately.
Many experts recommend not reporting a net annual loss for your business, especially a small one. When the federal tax watchdogs see your net business loss, it’s a red flag. You must report all income, but you are not required to report every expense. So, delete a few expenses, so you make a net profit.
Issuing 1099s is a big issue for the IRS. If you claim business deductions for compensating your contractors, you must issue the proper 1099s and adhere to appropriate reporting procedures. So if you missed this year’s deadline, never let it happen again. Just make sure you require contractors to give you their W-9s before you will pay them.
Unusual deductions get the attention of the IRS. For instance, if you claim a charitable deduction of 50% of your income, this will probably get the attention of the IRS. Also, if you are a sole proprietor and use Schedule C, showing losses for more than three years may get the agency’s attention.
Having your own small business is a great way to save on taxes. But if you report as a sole proprietorship, you have a higher chance of being audited. It is best to file as a corporation or partnership when you can. But if you regularly file losses, it gets more complicated. The IRS may argue that you are engaging in a hobby, not a business.
However, if you make a lot of money, you will see more savings by filing as an S-corporation. According to some sources, this can reduce your chances of being audited by 15 times.
Many people do not realize it, but putting round numbers on your tax return can be a large red flag. Also, the best way to engage in good bookkeeping is never to estimate things. Instead, be as accurate as possible and keep excellent records, so you do not have to guess at anything.
The IRS wants you to donate clothes, cars, food, furniture, and more to charity. It encourages this behavior by providing a deduction in return for your donations. However, it is up to you to decide the value of the things you donate.
Generally, the tax agency likes to see you value the things you donate between 1% and 30% of what you originally paid for it. However, many of us do not know this or may just ignore it.
Many tax returns are chosen for an audit because people make simple math mistakes. So, when you complete your tax return, ensure everything goes up. Further, be sure your capital gains or losses’ dollar value is correct. Making small errors can make the IRS notice.
Many people are tempted not to report all of their income. However, you need to report all income you receive all year long. If you do not report your income and the IRS catches you, you must pay back taxes, penalties, and interest.
Can the IRS always tell if you have reported everything? No, not always. The tax system is never perfect. But it is common for people to take cash for a service they do. Then if the person who paid you cash gets audited, the IRS will see the cash payment in the bank account. The agent then will go after that lead and ask the audited person what their payment was.
If you did not have income and file a tax return to confirm it, that was the right thing to do. However, your chances of being audited are more than people who report their income. The Motley Fool reports that 3% of tax returns in 2016 with no income reported were audited.
If you are selected for an audit, it will probably be a correspondence audit. This letter will inform you that you were chosen for an audit. It also will tell you the information that you need to send them.
Review the letter and send all information to the agency by the date they request it. If the IRS wants more information, they will send you another letter. This sounds simple, but these correspondence audits can be complex for many people to complete. Sometimes, you may need an attorney to assist you.
If you do not have all documentation for the deductions you claimed, then the agency may say you are not entitled to the deductions. Note that the IRS has three years to audit tax returns from the filing date. If you seriously underpaid your taxes, the time limit increases to six years. Many experts say you should maintain your tax records for at least four years.
If you are facing a legal tax matter, it is understandable if you feel lost and overwhelmed. There is so much information online about tax problems it can be challenging to know what to do. Fortunately, retaining an IRS tax lawyer can make things go much better for you.
Your attorney will act as the liaison between you and the IRS and negotiate for you. It is critical to avoid making mistakes in this serious matter, so talk to an experienced Chicago IRS tax attorney as soon as possible. Contact North Suburban Legal Services today at (312) 909-6089.