A business or individual is audited when the Internal Revenue Service (IRS) decides to look more closely how they have filed their tax returns. Being audited is not very fun, even if the person or business has been completely honest and up-front in their dealings with the IRS, and so learning how best to minimize the chances of being audited is important to many people.
In the past few years, the IRS has begun an aggressive campaign to find and address tax evaders and those who file fraudulent tax returns. The bulk of this focus is on individuals earning in excess of 100,000 US dollars (USD) per year, or businesses worth more than 8 million USD. Nearly 2% of individuals and businesses in this bracket are audited each year. For people earning less than 100,000 USD each year and small businesses, the chances of being audited are immediately reduced drastically, with less than one-half of 1% being audited – a number that seems to be staying fairly steady, if not dropping somewhat.
There are a few things that an individual or business can do to lessen their chances of being audited by the IRS, most of which are fairly straightforward. The IRS has a few things they consider high-risk factors, and eliminating or reducing these will lower your chances of being subjected to further scrutiny. Most accountants will point out the worst of these “red flags” during your tax preparation process, but there are some steps you can take early on to ensure that, come tax day, you are in the best possible position to avoid an audit.
First and foremost is ensuring that all the information on your tax form is correct. The majority of audits occur when the IRS notices that a social security number or tax number has been incorrectly reported or that numbers on the tax forms don’t add up. Check and double-check the information you submit to the IRS to make sure no small mistakes make it through, and you will drastically reduce your chances of being audited.
Eliminate or reduce business expenses related to entertainment, food, or your car. The IRS considers these three areas some of the largest potential inroads to incorrect reporting. Many people and businesses claim these expenses for business purposes, when in the eyes of the IRS they would be better classified as personal. If you do claim entertainment, dining, or automobile expenses as business write-offs, be sure you have documentation to back it up – and if you are concerned about an audit, be aware that claiming even appropriate write-offs in these areas may trigger an audit.
Lastly, be aware that any areas in which you might stand out from an average person filing will make you more likely to be audited. If you live in a high-cost area like Beverley Hills and claim an income of 20,000 USD, the IRS will probably be suspicious. Similarly, if you have a small salary and claim above-average deductions, they will want to verify that you have the documentation to back it up.
Ultimately, minimizing your chances of being audited can only take you so far. A decent percentage of audits the IRS conducts are selected completely randomly, and no amount of care on your part can protect you entirely. The best protection you can have is to be prepared for an audit, should it occur, by keeping detailed and well-organized records of income and expenditures and by making sure all the information you file is correct and complete.