United States
Staffed with 100% US Employees

Top 5 Ways to Avoid an Audit

January 13, 2015 by Ed Becker

As the tax season begins, everyone is thinking about filing their returns. Not many people are thinking about getting audited; the stress of being audited is enough to keep most people honest. Even honest people and small business owners get flagged for the dreaded audit. There are things you can do or avoid doing that will lessen your chances of getting selected for an audit.

1. Be Honest

First and foremost, the most important thing that you want to be is as honest as possible. Tax filing is serious. There is no room to bend the rules, or try to omit information. Although it is possible that it saves some people a little bit of cash if they bend the rules, in the long run it could cost you so much more than it was worth.

2. File Electronically

The IRS encourages individuals and small businesses to file electronically. The error rate of manually prepared returns is several times higher than electronic or software generated returns.

This is a benefit for your small business as well; it takes the risk of human error in calculations and transposing numbers away.

3. Extremely High Income/No Income

Audits are generally flagged on incomes that are very high ($100,000+). For those in this income bracket, the audit percentage is high because it is such a small group of returns. There is also the flip side of that coin: those with little to no income also have a higher chance of getting audited.

If you are in one of these income groups, ensure that you keep extra detailed documentation of all income and deductions. If you have unusual deductions, send in explanations with your copied documentation. If your return does get flagged for an audit by the software, a human review of your documentation may prevent an actual audit.

4. Avoid Payroll Tax Issues

Payroll taxes are a definite red flag for small businesses. Ensure that you are very careful how your employees or private contractors are classified and paid. Ensure that all your forms are properly filled out and filed on time, and that you pay the employee taxes diligently.

5. Schedule C Filers/Cash Businesses

If you are a cash business: waitress, bartender, hairdresser, or a business that typically keeps their own books, you are more likely to be audited. Schedule C filers raise the chances for an audit for cash basis businesses, as well. This is where honesty and detailed bookkeeping and records are very important.

There is no sure way to avoid an audit. It is a Russian roulette type of thing, because no one actually knows what causes the auditing software to flag certain returns and not others. As long as you are diligent and honest with your income, deductions, and tax reporting, you will have documentation to support your numbers, even if you do get audited.

Related Posts