How To Avoid an IRS Tax Audit?

The IRS enforcement has substantially increased over the past couple of years, which means that the Internal Revenue Service employs more agents who now have more capacity to perform Audits and reviews The IRS enforcement has substantially increased over the past couple of years, which means the Internal Revenue Service employs more agents who now have more capacity to perform Audits and reviews the IRS just received $80 billion dollars in funding in mid-2022 to hire more people and to implement modern software to enforce tax compliance

What is an IRS audit?

An IRS audit is a very detailed review of your tax return or your tax returns there are two types of an IRS audit the first one is by mail and is technically called a correspondence examination the second type is face to face, and it typically takes place in person at an IRS office or at your place of business the decision whether an audit is by mail or in person is made based on the complexity of your tax return and essentially what red flags the IRS sees that triggered the audit one of the questions I typically most popular

How far back can the IRS audit?

Generally, the IRS can include returns that were filed within the last three years in an audit now if they identify what they refer to as a substantial error they may add additional years, but they typically don't go back more than the last six years which brings us to those red flags that we want to avoid at all costs

The first and probably the biggest red flag is failing to report all of your taxable income report all of it whether it is your W-2 your side hustle income your investment gains anything the IRS already knows about it anyway in most cases make sure that you are taxable income is accurate another major red flag is excessive deductions & tax credits what the IRS will do is the IRS will compare the itemized deductions and credits taken on your return to the average totals for similar taxpayers and the same income bracket if yours is higher the IRS may look at the numbers more carefully the third red flag I want you to know about is engaging in cash transactions under the bank secrecy act various types of cash transactions that are in excess of $10,000 dollars are required to be reported, so your bank is already reporting them anyway to the IRS these last two years there are additional reporting requirements for apps like Venmo PayPal and several other ones so if you make large cash purchases or deposits be prepared for a letter from the IRS

How to prevent an audit?

The first step is to avoid Schedule C and Schedule E at all costs if possible this is for those of you who have a business or even a side hustle that brings money, reporting your business as a sole prop ridership will increase your chances of an audit an easy option to fix this would be to form an LLC a limited liability company and then report your business income under your LLC if you have a partner then, of course, you might want to form a partnership instead

If you are small business reports consistent losses it even gets worse the IRS could easily argue that you are operating a hobby not a business so that's not going to be a good situation either on the other hand if your small business is really profitable, and it's your only source of income you would see a lot more savings with an s-corporation, and it will help you reduce the chances of an audit by at least 15 times and that is according to some statistics that available online so this would allow you to take those write-offs and not have to worry about it

Avoid round numbers

This is an easy one, but somehow we're all drawn to simplifying and just rounding up our expenses the IRS does not like that, for example, let's say you have several rental properties, and you purchase a new dishwasher for one of the properties the dishwasher costs let's say $439 dollars, but you end up rounding it up to $450 or even $500 this is a major red flag good bookkeeping will help you avoid making these mistakes

Payroll tax reporting

If you have an LLC that's taxed as an s-corporation you have considered your own employee try not to get behind on payroll reports and with holdings remember if you own and operate and ask a Corporation it's just as critical the IRS will notice that none of those things are being done a good way to make this simple for yourself and make sure that you don't miss reporting related to the payroll is use a payroll service provider Gusto is an amazing company and it's really easy to sign up for their service you'll never have to worry about any of this again

Issue 1099S

The IRS pays a lot of attention to when you are claiming deductions for paying contractors you need to issue 1099s in January so that you and your contractors can file your tax returns again a payroll service provider will do that for you a quick tip for you is to remember that you need to request w9s from all contractors before you pay them for their services

File your tax returns on time

Please take time to do it, even if you owe taxes, but you cannot afford to pay them that situation is in and of itself bad but not filing a return because of it makes it 10 times worse I realize that many taxpayers may not have the money for taxes, so they simply don't file they choose to hide and avoid filing this only causes more problems down the road and personal stress levels that you can't imagine, so I encourage you to still file even if you don't owe anything, or you don't have any income to report penalties are worse if you don't, so you can always get on a payment plan or even be placed in an uncollectible status but just make sure that you do file your return