One of the most stressful financial situations a person can go through is dealing with the Internal Revenue Service. Whether you’re facing liens and wage garnishments or about to enter a collection due process hearing, the IRS can be intimidating. Having someone on your side to assist in negotiating installment agreements or to help you defend against incorrect tax liability claims is one way to get tax relief. Understanding how to avoid an audit is another.
Avoiding red flags on tax returns and other documents can reduce the chance of an audit. Individuals who earn cash-based income, such as servers who rely on tips, may not think accuracy in reporting income is essential. The IRS, however, uses averages and thresholds to estimate what servers likely earn; when income is reported far below the threshold, questions are raised.
All income, including cash, 1099 income and W-2 income, must be reported on returns. When you’re reviewing the income you reported, make sure to review all other information closely. A typo in a social security number or any other figure on your return could slow down processing and even result in an audit.
Business returns are also at risk of raising red flags. A business running over three years at a loss may be considered a hobby by the IRS, making the deductions invalid. For startups or businesses that are truly running at a loss, documentation is essential to proving information is accurate.
Other items that can raise flags include charitable giving that accounts for a large percent of your income, improperly claiming tax credits and simply reporting a high income. According to news reports, individuals earning over $1 million annually are 12 times more likely to be selected for a tax audit.
Effective tax administration and ongoing tax education are the best ways to avoid or combat IRS woes. Understand and follow the rules to avoid an audit, and understand how to work within the rules to reduce headaches during an audit.
Source: Money Talk News, “Tax Hacks 2014: 8 Tips to Avoid an Audit” Allison Martin, Jan. 22, 2014