Getting audited by the IRS flat out stinks. The IRS sends you an audit letter in the mail notifying you that you are being audited and to contact the auditor to schedule an appointment. Then, the auditor gives you a document request list that you need to put together before your meeting. From there, they will either agree or disagree with the items before giving you a proposed balance due. At this point, you can either agree or go to appeals. In all, the process can be arduous, often lasting six months or more.
Luckily, if you’re equipped with the right knowledge, getting audited by the IRS doesn’t have to be an annual fear. Here are some ways to best avoid an audit.
Track Charitable Contributions
Altruism can be a beautiful thing that brings people closer together. But sometimes, people use charitable contributions to their financial advantage. If you donate an excessive amount that’s not aligned with your income, it may trigger an audit. Every year the IRS picks up on people trying to dodge taxes through write-offs with charity donations. In the chance the IRS audits you, here’s what they would require you to provide:
- Keep a receipt of any donation up to $250. For anything more than $250, the receipt must state whether or not you received anything in return for your contribution.
- If the donation is under $250, a bank statement or credit card record will pass the IRS test.
Deduct Your Business Expenses
Throughout the year, you should track your business expenses for a deduction. These can include travel expenses, meals, or any other business-related expenses like office supplies. The key here is to only deduct expenses that are ordinary and necessary for your business. For example, if you own a construction company do not try to write off a trip to Hawaii with your family. Conversely, if you have a consultation in Hawaii with a client or do business in Hawaii, some of these expenses are ‘ordinary and necessary’ deductions.
And if you base your business at home, make sure you educate yourself on home office deductions.
Math errors used to be a bigger issue when people prepared taxes by hand, but you can still err with data entry. If you’re working with an experienced C&D tax professional, these errors are even less common.
Report Your Income
Getting paid under the table is great, right? Not so fast. The IRS has ways of detecting unreported income. If you work as a freelancer and earn over $600 a year from one employer, they must send a 1099 form to the IRS. This form automatically puts you on their tax radar so that you pay your fair share.
If this tells us anything, it means don’t get coy and not report any of your income. You may face a more significant tax penalty down the road.
Claiming Losses for a Hobby
We all love our hobbies; photography, writing, action sports, and more. The difference when claiming those as losses or deductions is whether or not we make any form of substantial income from them. The IRS aren’t fans of false claims. If they notice you’ve never been paid for photography, claiming losses on your new Canon EOS 5DS R may trigger an audit.
How C&D Can Help
Just being aware of these signs can help prevent you from experiencing an IRS audit. But if you feel like your financial records put you at risk, contact C&D today, and we’ll get you back on the audit-free path.