How To Avoid A Tax Audit: A Guide For Business Owners

A tax audit is a review of a taxpayer’s accounts and financial information to ensure the information is reported correctly according to tax laws. Tax audits are usually triggered by deductions of income listed on a tax return, but taxpayers can also be selected at random for a tax audit.

All tax audits are not equal, and some are more daunting than others. Depending on the information you gave the IRS, you might receive a notice that an IRS agent wants to audit your records. Here are the types of IRS audits that you could receive:

Correspondence Audit 

Correspondence audits are the most common type of IRS audits, and they involve the IRS sending a letter in the mail asking for more information about a certain part of your tax return. If the information you provided in your tax return doesn’t correspond to what the IRS has on record, you could get a letter from them.

If you have prepared your tax return correctly, and you have the necessary information to back up the items on your return, you should be able to resolve the audit. If you are missing some information or documentation, you need to hire a professional to assist you.

Office Audit

If the issues with your tax return are too complex for a correspondence audit, you will get a letter requesting that you go to an IRS office for an audit. Office audits surround issues about business profits/losses, rental income/expenses, or itemized deductions.

The office audit involves an interview that consists of questions related to the issue on the record. There might also be generalized questions about lifestyle, financial position, and employment.

Auditors are well-trained tax professionals who can fish out incriminating information from interviews. So it’s best to seek advice from a professional before an office audit. A typical office audit only lasts a day. If the IRS wants more information, they will give you time to provide the necessary information.

Field Audit

A field audit involves an IRS agent visiting the taxpayer’s home or office to examine records.

When an IRS agent visits an office, they might ask to see financial records, seek interviews with employees, and ask for a tour of the office. This audit will be used to find out the internal controls, management structure, and accounting procedures. When an agent visits a home, they would only ask to see financial records and hold an interview with the taxpayer. This audit could last anywhere from a day to a week, depending on the account.

If you’ve been selected for a field audit, it’s best to hire a tax attorney who would be present at the time of the audit because what you say can be used against you. Your tax attorney would communicate with the auditor on your behalf to ensure the scope of the audit is not expanded.

How to Avoid An IRS Tax Audit 

Statistics have shown that taxpayers with high income are more prone to being audited by the IRS because of the complexity of their returns. But, limiting how much you earn isn’t the solution to avoid a tax audit – we all want to earn more.

So how do you avoid a tax audit? There is no guaranteed way to avoid an audit, but luckily, there are some tips that can reduce your chances of being audited.

  • Record All Income

Underreporting your income can put you at risk for a tax audit. Don’t omit any income in your tax report, no matter how little the amount. Report all the income you’ve earned during the tax year, including any assets you sold. Failure to report your true income, including the extra money you received throughout the year, such as the sale of an asset, can result in a tax audit.

  • Review your details

It seems like a no-brainer, but a common reason the IRS may pull your filing is that you forgot to sign your tax return. Forgetting to sign your tax return isn’t the only mistake you can make. The mistakes vary from failing to date the return to using the wrong postage or calculating wrong deductions. While these mistakes seem common, the IRS lists them as issues. Be sure to carefully review every page on your file – check for details such as the spelling of your name, social security number, and other errors.

  • Claim Only Legitimate Tax Deductions

Tax deductions are great, but certain tax deductions are often closely scrutinized. Home office deductions, meals, travel, and charitable donations are red flags. This doesn’t mean you shouldn’t take this deduction, but make sure you comply with the requirements. If you qualify for a deduction that is abnormal for your business type or size, make sure you have clear records to show the IRS in case of a tax audit.

  • Be Careful with Schedule Cs

As a self-employed taxpayer, you should be familiar with Schedule C. If you aren’t familiar with Schedule C, it is used to report how much money you made or lost in your business. Unfortunately, the IRS heavily scrutinizes Schedule Cs. This means you have to be extra careful when preparing yours. Consider hiring a tax professional or an accountant to prepare your form correctly.

  • Don’t Leave Any Question Blank

Make sure you answer every question on the tax form, even if it seems irrelevant. An unintentional oversight could get your file attention you don’t want. If you are a small business, your odds of an audit are small, so don’t give the IRS a reason to pay closer attention to your file because you left some questions blank.

  • Hire An Accountant

If you want to avoid a tax audit, the best thing to do is hire an accountant or tax professional to file your taxes. Not only will this reduce your chances of a tax audit, but you also stand a better chance of maximizing your tax deductions.

Should you ever find yourself facing a tax audit, do not panic. Stay organized, hire a tax professional, and you should easily be able to defend yourself to the IRS in an audit. But hopefully, these six tips will help you avoid a tax audit. Let us know if you found these tips helpful.