Scared You’ll Get Audited This Year? Avoid These 4 Common Mistakes
I know a lot of people who get stressed out by the hours of tedious paperwork they need to have each tax season. It’s even more frustrating if they’re doing everything themselves.
While cutting corners can get things done quickly, you may end up in hot water with the IRS if something goes wrong.
Getting audited by the IRS is no joke. Besides adding more frustration, they’ll cost you much more money if they suspect you didn’t pay enough.
Luckily, there are steps you can take to ensure everything goes smoothly this year.
Our quick guide will discuss taxpayers’ most common mistakes when filing and how to avoid getting audited. Let’s get started!
How Do Tax Audits Work?
Before we get into how to file your taxes correctly, it’s good to know how the IRS does its audits.
A financial audit is when someone reviews a person or business’s accounting records to see if they’re transparent about their earnings.
In your case, the IRS will audit your finances to see if you’re avoiding taxes, committing fraud, or violating tax laws. Auditing helps them collect extra revenue each year and discourages people from breaking the law in the future.
If you get audited, the IRS will send you a letter requesting additional information regarding your expenses, income, or deductions. It can also request a face-to-face meeting to discuss your finances further.
You can face legal consequences if the IRS determines that you haven’t been compliant, including hefty fines and jail time.
Are Tax Audits Common?
Tax audits are less common than you might think. About 4 in 1,000 tax returns were audited last year, so it’s unlikely to happen to you.
The IRS uses the Discriminant Information Function, which determines which accounts to analyze based on past returns with similar careers and incomes. You should be safe if you’re within the average and have a low DIF score.
Still, it doesn’t mean you’re in the clear just yet.
The IRS conducts tax audits randomly, so you never know if you’ll be selected. But if you stay compliant and document your expenses, there’s nothing to worry about.
How To Avoid An Audit On Your Tax Return This Year
Now that we’ve gone through an overview of what to expect in a tax audit, here are a few key ways to stay compliant each year:
Keep Detailed Records
If you think the receipt for your latest office software doesn’t matter, guess again.
Tax credits and deductions can be a double-edged sword for many taxpayers. Despite their advantages, they’re also one of the main areas the IRS pays extra attention to.
Anyone who wants to take advantage of these must have the receipts to back the numbers up. This way, you can confidently track your expenses for tax season and have the paperwork ready in case of an audit.
Be Reasonable With Deductions
Deductions are there to help business owners and freelancers grow their businesses while managing their taxes efficiently.
But if you’re reporting a huge home office or throwing in irrelevant expenses like your Netflix account, this can be a quick way to get the IRS on your back.
Always do your research or double-check with a tax expert if you’re unsure which deductions you should use.
Report All Your Income
If you made $50,000 this year, the IRS expects you to report all of it. Inconsistencies in your earnings that don’t match your income will quickly raise suspicions.
The IRS knows every business has different ways of operating. But with so much affordable software available to help you manage your finances, it’s easier than ever to track what you make.
File Electronically
When you file electronically, it’s more convenient to edit any mistakes. The digital filing system also makes it easier for the IRS to scan through your information quickly.
As a taxpayer, any steps you take toward managing your accounting systems and finances prove to the IRS you’re on top of your finance and have nothing to hide.
The Bottom Line
Getting that audit letter from IRS is scary to think about for most taxpayers. Thankfully, they rarely happen.
As long you’re transparent with your finances, you’ll never have to worry about one in your lifetime. In the rare case you get audited, show them everything you have, stay calm, and we promise you won’t have any issues!
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