Are You Raising Your Chances Of Getting A Tax Audit?
Managing taxes is perhaps one of the most challenging aspects of running a business. Filing your returns on time and paying taxes before the deadlines can be stressful. What’s more, the prospect of getting a tax audit is even worst for any business owner. If you go by the stats, the chances of getting an audit notice are very few but this does not make it any less scary. The best thing to do is to avoid getting an audit in the first place.
This is easier said than done because lack of awareness is the most probable reason that you may get one. You could be making some mistakes in your tax returns that would ultimately get you under the lens. Unless you commit an intentional fraud or evasion, the audit notice may come out of the blue. Wouldn’t it be better to be aware of the right way? Or know what you may be doing unintentionally to raise your chances of getting a tax audit? Here are a few things that can elevate the probability of getting a notice from the IRS.
Filing taxes at the last minute
If you consistently delay filing your taxes due to one reason or the other, you increase your risk inadvertently. This may happen because of mere procrastination or being dependent on your CPA, but the results can be dire. Rushing through the tax deadlines elevates the chances of mistakes such as entering the wrong data or missing the key information. Whatever the mistake may be, you can get a notice for it. The resolution is simple; pledge to stay ahead of the deadlines so that you don’t have to rush through at the last minute.
Filing on paper
If you belong to the old-school, you will probably want to file your taxes on paper rather than electronically. But this may be another way to elevate your chances of getting an IRS notice. Once again, this happens because the probability of errors is higher with paper returns as reported by the IRS. Compared to the error rate of 21% on paper returns, it is just 1% for electronic returns. Something as simple as opting for electronic returns can save you from the stress of getting a notice!
Not reporting your side income
Another reason why you may get into an audit hassle is the failure to report your side income, even if you do it unintentionally. If you are a salaried person or even a business owner pursuing a side hustle, you must absolutely report it. The income could be from a freelance project or in the form of bank interest. If you are confused about reporting side income, it is best to consult an expert. Get advice from tax attorneys who are licensed to practice in all 50 states because they can guide you best, considering both state and federal tax norms. If you fail to report this income, however insignificant it may be, you could end up being audited.
Guessing at numbers
Accuracy is one thing that matters the most to the IRS. So you need to ensure that you get your numbers right when you sit to file your taxes. Guesswork on your revenues, expenses, and deductions raises a red flag. Don’t take things frivolously because the IRS will not be happy with these figures, even if these are fairly close. Have everything on paper because documentation validates your claims and makes things transparent for the authorities. Make sure that the numbers in the return are an exact match with your records if you want to lower your audit risk.
Being careless with deductions
The IRS allows you to claim a host of deductions that can lower your tax burden to a considerable extent. But you need to be cautious while claiming these deductions and stick to only the legitimate ones. For example, claiming deductions that are disproportionately high relative to your income may land you into trouble. One of the best examples is that of charitable donations because you will be able to donate a heavy amount only if your business is making good money. Simply speaking, if you deduct too much, the IRS may choose to scrutinize your return more closely. Claiming too many deductions in round figures is another way to increase your risk.
If you are doing any of these, you are boosting your audit risk to a significant extent. Even though the errors may not be deliberate, the risk still runs high. So you should make a conscious effort to avoid these situations in every way.