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I’m a certified public accountant, and the founder of tax firm TaxedRight.com, where I’ve helped clients file hundreds of tax returns. Perhaps their biggest fear is an audit — and rightfully so. Audits are expensive, time consuming, stressful, and steal your time away from living your life. While there is no absolute way to guarantee that you won’t get audited, you can turn the odds in your favor by applying these six actionable strategies.
1. Use electronic tax software
While you’re allowed to mail a paper tax return to the IRS, you shouldn’t. Forcing the IRS to hand-key paper information means that somebody at the IRS is directly looking at your return — and could question anything he or she sees. Don’t give the IRS this chance, and always e-file if you can.
2. File your taxes on time, even when you can’t pay
From my experience, the IRS heavily scrutinizes taxpayers who don’t file their taxes, especially if they haven’t filed for multiple years. Eventually, you find yourself owing the IRS not only the tax, but also substantial penalties and interest. The fix is simple: always file on time (a tax compliance issue, their top priority), even if you can’t pay (a tax collection issue, their secondary priority).
3. Report all of your income
The IRS automatically gets all the same tax documents you get. W-2s, 1099s, 1099-Bs from your trading brokerage, 1099-S’s from selling your home, etc. Always report all your income, even if you owe zero tax. That’s because the IRS’s internal computer system checks that you have reported everything.
One of my clients had their previous accountant fail to report their home sale on their tax return, because they had a legitimate tax exemption. That caused the audit. Don’t let this happen to you.
4. Don’t overstate your home office deduction
The home office deduction is one of the most abused tax deductions. You are allowed to use the business percentage utilization of your home office as a write-off. You do this by dividing your business office square footage (sq. ft.) by the entire square footage of your home (e.g., home office is 100 sq. ft. but your entire home is 1,200 sq. ft. This makes your business use percentage 8.33%, 100 divided by 1,200). So you can deduct 8.33% of your indirect home costs such as rent, mortgage interest, property taxes, utilities, etc. Do not overstate these numbers or you will risk an audit and a personal visit to inspect your home. An IRS agent is a guest you can do without.
5. Avoid perfectly round numbers if you can
To the IRS round numbers might signal that you made up a number, even if they’re accurate. It’s human nature; after all — which sounds more accurate to you: a $2,000 telephone expense or a $2,438.34 telephone expense?
6. Keep good records – especially for large transactions
When you’re taking large write-offs, be sure to keep good records. It can take the IRS a few years before it even sends out audit letters (in 2022 audits are usually for 2020.) So keep your records in good order. If you purchase a car or a computer, or if you donate a large sum to charity and you write it off, be prepared with a good record just in case the IRS ever asks.
Romeo Razi is a CPA and founder of TaxedRight.com, which specializes in tax services for small businesses in the professional services niche.
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