An audit is an examination of your financial records by the IRS to ensure that you're paying the correct amount of taxes and complying with tax laws. There is NOTHING to be scared of if you are working with a tax strategist throughout the year.
The IRS conducts audits to minimize the "tax gap," or the difference between what the IRS is owed and what the IRS actually receives. Sometimes, a tax return is selected for audit at random, while other times, the IRS might audit you because your return involves transactions with another audited return, such as an investor or business partner.
When you're audited, the IRS will investigate your income, expenses, and deductions. They'll review your financial records and ask you to provide documentation to support your claims. If they find any discrepancies, they may adjust your tax liability and assess penalties and interest.
Some things can increase your chances of being audited. Here are some of the most common audit triggers:
Failing to report all your income is one of the easiest ways to increase your odds of getting audited. The IRS receives a copy of the tax forms you receive, including Forms 1099, W-2, K-1, and others and compares those amounts with the amounts you include on your tax return. If they are not the same, there is a good chance you'll be audited.
To avoid this, keep track of the forms you receive and report all of your income. If you're not sure how to report a particular type of income, consult with a tax strategist at Anomaly now!
Making math errors is another way to increase your odds of getting audited. Don't make mistakes. This applies to everyone who must file taxes. If your math is a little shaky, using good tax preparation software or a tax preparer near you can help you avoid unfortunate errors that can lead to an IRS audit.
The IRS uses data analysis tools (much to the surprise of many). If you drive a Mercedes and claim $20k of income, watch out!
If your deductions are an abnormality compared to your income level, it could get flagged. That does not mean you cannot claim every legal deduction! You absolutely can and should. However, if you fabricate deductions, the IRS will catch onto this. Use proven tax strategies from tax strategists only.
If you're self-employed, you might be tempted to hide income by filing personal expenses as business expenses. But before you write off your new ski boots, consider the suspicion that too many reported losses can arouse. The IRS may begin to wonder how your business is staying afloat. Make sure you keep detailed records of your business expenses and report them accurately.
A Schedule C (single member LLC or sole proprietorship) statistically will be audited at a higher rate than a C Corp, S Corp or even partnership!
If you have financial assets outside the U.S., make sure you report them. If the IRS suspects that you have $10,000 or more in one or more foreign financial accounts and have not filed a Foreign Bank Account Report (FBAR), or if they believe you misreported assets and income on the FBAR, you may be subject to audit.
The IRS continuously conducts investigations to identify and stop taxpayers who engage in abusive tax scheme transactions. You may want to avoid entering into these types of transactions in the first instance.
The IRS eventually tracks down the participants and their tax returns and imposes steep penalties in some cases, if abuses are found.
Now that you know what can trigger an audit, here are some strategies you can use to minimize your audit risk:
Keeping good records is one of the best things you can do to minimize your audit risk. Make sure you keep all your financial records, including bills, receipts, and bank statements. You should also keep track of your income and expenses throughout the year.
Hiring a tax strategist can help you minimize your audit risk. A tax strategist can help you navigate the complex tax code and identify deductions and credits you may be eligible for. They can also help you keep accurate records and ensure that your tax return is prepared correctly.
Connect With An Anomaly Tax Strategist Now
Making sure your tax return is accurate is essential to minimizing your audit risk. Double-check your math and make sure you report all your income and deductions accurately. Rounding numbers is never allowed and will cause issues down the line.
Avoiding abusive tax shelters is another way to minimize your audit risk. If something seems too good to be true, it probably is. Be wary of any transactions that promise to reduce your tax liability by a significant amount.
Using tax optimization strategies can also help you minimize your audit risk. Tax optimization strategies involve structuring your business and personal finances in a way that minimizes your tax liability. This can involve things like setting up a retirement plan, investing in tax-free bonds, or taking advantage of tax credits and deductions.
Consider using an entity that has a separate tax return. If your Schedule C gets audited, yes, the IRS can and will audit your Venmo as well, since this all is on your personal tax return.
Keeping your personal and business finances separate is another way to minimize your audit risk. Make sure you have separate bank accounts and credit cards for your business and personal expenses. This will make it easier to track your business expenses and avoid commingling your personal and business finances.
Audits can be a headache, but there are strategies you can use to minimize your audit risk. By keeping good records, hiring a tax strategist, being accurate, avoiding abusive tax shelters, using tax optimization strategies, and keeping your personal and business finances separate, you can minimize your audit risk and maximize your wealth. Contact us to ensure that you're taking advantage of all the tax strategies available to you.
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