IRS Audit Prevention
The IRS uses patterns and statistics in deciding which taxpayers to audit. By decreasing the "red flags" on your tax return, your chances of being audited are significantly reduced. Here are some of the red flags that you can avoid.
- Make sure there are no math errors on your return. The easiest way to do this is to have a tax preparer do your return or to use tax software.
- If at all possible, don't put down whole numbers such as $10,000 or $4,000 on your tax return.
- Consider forming a business entity to put your current Schedule C business into. Having a Schedule C on your tax return is one of the biggest red flags of all since business owners can hide income and try to treat personal expenses as business expenses. By filing a partnership or S corporation tax return instead of a Schedule C on your individual tax return, your chances of being audited decrease substantially. Partnership tax returns are by far the least audited type of tax return. LLCs are usually taxed as partnerships and are typically the best type of entity to use since they offer limited liability and flow-through taxation. You should consult with your CPA and possibly your lawyer to see if an LLC is right for you.
- Home office deductions are another red flag that can be avoided by filing a partnership or corporate tax return instead of using Schedule C. Your home office expenses are a lot less noticeable on a partnership or corporate return than they are on Form 8829 of your 1040.
- Make sure that your tax return numbers match the 1099s you receive from your broker, employer, or investment company. EXAMPLE: Your 1099 from your broker shows $55,342 in gross proceeds from stock sales. If the only stock you sold during the year was through your broker, the gross proceeds shown on Schedule D of your tax return should be $55,342.
Perhaps you're about to be audited by the IRS. Use our Audit Tips
to get through it.