Top 10 Tips to Avoid Tax Auditing: Keep your finances in order with these expert suggestions
No one wants to face a tax audit, but the truth is that many taxpayers may unknowingly take actions that can raise red flags with the Internal Revenue Service (IRS). While there’s no surefire way to completely avoid an audit, there are steps you can take to minimize the likelihood of drawing unwanted attention to your tax return. Here are our top 10 tips to help you avoid tax auditing and keep your finances in order.
Tax Tips: Be Accurate and Thorough
Accuracy is crucial when it comes to filing your taxes. Double-check your calculations, make sure you’re using the correct tax forms, and ensure that you’ve provided complete and accurate information. This includes reporting all your income, as underreporting can trigger an audit. Don’t forget to include even small amounts from side jobs, as the IRS will likely have a record of those earnings.
Report All 1099 and W-2 Income
The IRS receives copies of all your W-2 and 1099 forms, so it’s essential to report all income received, including wages, interest, dividends, and freelance income. Double-check the amounts on your forms against what you report on your tax return to avoid discrepancies.
Avoid Filing Paper Returns
Filing your taxes electronically can significantly reduce the risk of making errors, as the software automatically checks for issues and prompts you to fix them. According to the IRS, the error rate for paper returns is around 21%, while the rate for electronically filed returns is only 0.5%.
Keep Organized Records
Maintaining well-organized and accurate records is essential to avoid discrepancies in your tax return. If you’re audited, having clear documentation will make it easier to prove your deductions and credits. Keep receipts, invoices, and other financial records for at least three years, as this is the typical period the IRS can audit.
Be Cautious with Deductions
Claiming unusually high deductions can catch the attention of the IRS, especially if they’re disproportionate to your income. While you should claim all legitimate deductions, be careful not to inflate your expenses. Always have documentation to back up your claims in case of an audit.
Be Mindful of Business Expenses
The IRS scrutinizes self-employed individuals and small business owners more closely than regular wage earners, as they have more opportunities to manipulate their income and expenses. Ensure you separate your personal and business expenses, and only claim deductions that are directly related to your business operations.
File on Time
Filing your tax return late or requesting multiple extensions can raise suspicion. To avoid drawing attention to your return, file on time and pay any taxes owed by the deadline.
Check Your Math
Simple mathematical errors are one of the most common reasons for the IRS to question a tax return. Double-check your calculations and consider using tax software to minimize the chance of errors.
Report Foreign Assets
If you have foreign bank accounts or assets, make sure to report them as required by law. Failing to disclose foreign financial assets can result in severe penalties and increase your likelihood of an audit.
Seek Professional Help
If you have a complicated tax situation, it’s wise to consult with a tax professional who can help you navigate the process and ensure your return is accurate and compliant. They can also offer guidance on tax-saving strategies and help you avoid potential red flags.
While there’s no foolproof way to avoid a tax audit, following these expert tax tips can help you minimize the risk and keep your finances in order. Remember, the key is to be accurate, thorough, and honest in your tax reporting. If you do find yourself facing an audit, you can contact Propono at (207) 901-1000 for a free consultation.