We wanted to pass along these valuable tax tips from the website of Indianapolis-based Lawrie CPA Group:
10 Ways to Avoid an Audit
This week we thought we’d share some great advice from our friend Dan Lacy (www.DynastyBuilder.com). This is the second of a 2 part series on ways you can avoid an audit.
Here are the first 5 again:
- Choose your tax return preparer with care.
- Report all of your income.
- Provide complete information.
- Avoid claiming deductions that are audit red flags.
- Don’t file certain forms or schedules.
6. Pay attention to details. Math errors or incorrect entries of Social Security numbers or tax identification numbers can easily trigger an inquiry into your return. Math errors can be greatly reduced by electronic filing rather than filing paper returns. In the past, the IRS had said that errors are less than 1% on returns that are filed electronically, compared with about 20% on returns submitted via paper. If an e-filed return has a math error, it won’t be accepted; instead it is sent back for correction and refiling.
But information on electronically filed returns is only as good as the information you submit. Reporting $2,000 in income when it should have been $20,000 is your mistake and one that likely won’t be noticed as a math error by a computer.
7. Mind your personal entries. If there are entries related to the personal side of your return, this can ultimately lead to scrutiny of your return activities. The IRS selects returns for audit in some cases based on a Discriminant Function System or DIF score, which is based on IRS experience with taxpayers claiming certain deductions or credits within set income levels. For example, if you claim charitable contributions that are higher than the average deductions for your income level, this could lead to a personal audit; the personal audit may be expanded to include your business activities.
8. Change your business status. IRS Statistics show that you are 10 times as likely to be audited as a Schedule C filer than if you incorporate your business and elect S corporation status. While it costs a bit of money to incorporate, the move affords you greater personal liability protection and reduces your chances of being audited. In deciding whether to change your business status, include both tax and non-tax factors.
Note: Forming a limited liability company for one owner will not give you any audit protection, because the owner still files a Schedule C.
9. Watch your state tax return. The IRS has information-sharing agreements with the states. If you are audited at the state level and owe additional taxes because of omitting income or for other reasons, this information is shared with the IRS. The information may then prompt the IRS to contact you asking for additional tax payment or to audit your return in more depth.
10. Plan for an audit, just in case. Because the IRS conducts random audits from time to time (such as a three-year random audit program for S corporations in 2007 and a current three-year random audit program for employment tax returns), any return could be selected for review at any time. Be prepared:
- Compile good books and records for your business activities.
- Retain required receipts and other documentation.
- Use separate bank accounts and credit cards for your business and personal activities.
Retain the records and receipts for your tax return for a minimum of three years (the period in which the IRS usually has to audit a return). However, keep in mind that the period becomes six years if 25% or more of income is omitted from the return, and there is no limit when it comes to fraud.
You can find out more about Dan Lacy at www.DynastyBuilder.com.
(src: The Lawrie CPA Group – Indianapolis Tax CPA’s)
