Doing taxes can be either super simple or extremely complex. Most people hire CPAs or tax advisors to file their tax returns on their behalf utilizing a tax portal like hrblock.com, taxhawk.com, or turbotax.com. Regardless of the method, all taxpayers are at risk of being audited at any moment. There are best practices to be applied to avoid being audited, and it is a taxpayers’ responsibility to ensure all T’s are crossed and I’s are dotted.
The number of audits conducted by the IRS has dropped dramatically since 2010. To be more specific, in 2022, the percentage of audits performed were less than 1%. With growing inflation, the government scaled back IRS funding which was reflective in the decrease of employee experience, capacity, and resource availability. The number of experienced tax auditors has also dwindled over the years, which directly affected the number of audits performed.
In late 2022, the government signed into effect the Inflation Reduction Act (IRA). The IRA is a 10-year plan designed to manage the country’s inflation rise – attacking problems like the federal budget deficit, refocusing the government’s investment efforts for long-term sustainability, and providing funding for technological improvements to improve the tax filing process. In addition, under this act, the IRS was allocated nearly $46 billion for “tax enforcement activities”. Such activities include hiring more tax agents, providing more legal resources, and investing into more “investigative” technology to assist with researching and tax evaluations. This is not a guarantee that the IRS will increase its number of audits performed, but it certainly means that the IRS will have more resources available to utilize more experienced professionals as needed. What does that mean for you? Instead of fearing that you’ll become the next victim, just be prepared. Here are a few audit prevention tips to consider as you are filing this year.
Audit Prevention Tips
1. Be Precise with your Numbers.
It’s very easy, particularly when reviewing your business budget allocations, to just round up when preparing your taxes. Allocations such as $1500 for marketing and $500 for business supplies send up red flags to the IRS. They want precise numbers and when they see round figures like this, it triggers them to follow up with you and ask for the matching documentation to support your claim. Round figures are fine when you are doing your projections. But your actual numbers should come down to dollars and cents, and that is exactly what the IRS wants to see.
2. Report all your Income.
Don’t leave any income out on your return. Sometimes this requires being educated on everything that constitutes income for your tax return. It’s more than your W-2 or income reported from your business. If you have stocks, or money earned from savings, this must be reported as well. Leaving out any income could trigger a flag from the IRS, and yes, result in an audit.
3. Too many Deductions.
We get it – no one wants to have to pay at the end of the tax year. When working on your taxes, your goal is to get a refund with the worst-case scenario being that you come out even. As a result, some people can get a bit overzealous in the number of deductions claimed on taxes to try and make the numbers add up the way they want. If you don’t have the proper documentation to file that deduction, don’t go down that road. It is better to file the honest way than to trigger an audit with the IRS. Make sure everything matches up accordingly before you file that deduction.
4. Earned Income Tax Credit.
If you are going to claim an EITC, like everything else, make sure that you have the proper documentation to back it up. During the pandemic, the government introduced additional earned income tax credits that helped the American taxpayers claim more than before. But now that we are getting back to normalcy, there will be more scrutiny behind each EITC claimed. This is an area to tread carefully, especially since the IRS now has the resources to follow up.
The bottom line when it comes to avoiding an IRS audit, is to keep copious records. If you have receipts and documentation to back up all claims on your taxes, you have nothing to worry about. Our recommendation is that you consult with a tax professional to ensure all of your I’s are dotted and your T’s are crossed.
But, why risk the possibility of an audit when you can partner with a professional to circumvent this process?
VAAS Professionals is a trusted CPA partner that can work with individuals and businesses to identify opportunities and minimize threats when it comes to an IRS audit. Schedule an appointment to review your options with us today.