IRS Audits are Not a Laughing Matter
Do you have visions of IRS agents with their feet up on their desks as they review tax returns? You may imagine them with smiles on their faces as they say, “Gotcha!” In all seriousness, an IRS audit can damage your reputation and hurt you and your business. Keep reading to find out how you can avoid the pain of IRS audits.
10 Super Easy Ways to Avoid IRS Audits
1. File an appropriate Schedule C for your small business.
The Schedule C is tax deduction paradise for self-employds. IRS agents love it because they know some of you get carried away with excessive deductions and don’t report all of your income. You can’t fool the IRS! Make sure your Schedule C is filled out appropriately.
2. Report all taxable income.
Make sure you report ALL taxable income on your return. Why? Because IRS computers are good at matching the numbers on forms with the income on your tax return. A mismatch is an IRS audit red flag that will result in you getting a bill.
3. Don’t claim huge charitable and other deductions.
Make sure your tax deductions are in proportion to your income and/or net profit. If not, you may be the lucky winner of an IRS audit. But there is one caveat – if you can back up the numbers, don’t be afraid to claim deductions.
4. Hire a reputable tax preparer.
See what happens when I don’t prepare your tax returns; you get an IRS audit. Always hire a reputable tax preparer! Get referrals from trusted business colleagues. Contact your local chamber of commerce and ask for a list of tax preparers.
5. Be kind to business partners, employees, and significant others.
Cross your business partners, employees, and significant others, and they could blow the whistle on you in less than 2.5 seconds! They may not even care about the informant’s bounty. They’ll do it out of spite. Ouch!
6. Report foreign a bank account and currency.
You can do business in foreign countries and have accounts in Hong Kong, the Caribbean, Switzerland, or other countries as long as you declare them on your tax return. Don’t think you can hide offshore accounts because you can’t.
7. Don’t claim 100% of your vehicle.
Claiming 100% of your vehicle is another IRS audit red flag. Why? Because it’s rare that someone will use an automobile 100% of the time for business. Keep in mind that heavy SUVs and large trucks are eligible for favorable expense write-offs and depreciation. You’ll want to keep detailed mileage logs and calendar entries for business trips.
8. Watch the home office deduction.
You must use home office space exclusively as your principal place of business or trade to get the standard rate of $5 per square foot of space deduction (maximum deduction is $1,500). You can’t use your spare bedroom or den for Friday Family Game Night or watching TV in the afternoon and at night.
9. Protest filing taxes.
The IRS doesn’t like it when you say that you don’t owe taxes because it’s illegal or applies only to weird income categories that you feel don’t apply to you. Respect the IRS and file your tax return or file for an extension.
10. Be wealthy!
According to 2014 IRS statistics, individuals with income of $200,000 or more had an audit rate of 2.71%. Did you report $1 million in income? You had a one-in-13 chance of your return being audited. Audited corporations with earnings between $250K – $1M higher penalties (percentage of adjusted gross income) than corporations earning $10M – $50M. It’s okay to be wealthy. But as your income or profit rises, it may trigger an IRS audit.
You Can’t Fool the IRS
Don’t try any funny business with the IRS because you won’t get away with it, at least not for long. You’ll get caught and pay a stiff monetary penalty and possibly do jail time. Even though Orange is the New Black, the color may not look good on you. Be smart and think twice about scamming the IRS.
Resources:
Kiplinger – http://www.kiplinger.com/slideshow/taxes/T056-S011-irs-audit-red-flags/index.html
Forbes – http://www.forbes.com/pictures/mjd45kllf/15-ways-to-invite-an-irs-audit-2/
