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How to Avoid an Audit
March 20, 2017
Approximately 1% of Americans will be audited each year if your gross income falls between $1 - $200,000. The more money you make the higher your risk of audit.
#1 Math Errors
Double and triple check your numbers! Even if you make an honest mistake, you can get hit with costly fines. If you are not having your taxes prepared by a professional, you may want to at least consider tax preparation software to avoid mathematical errors.
#2 Use Accurate numbers
The numbers on all of your tax documents will not be even and neat. However, you need to make sure to round your numbers appropriately on your tax forms. For example, if you have a Form 1099 in the amount of $994.25, round it up to $995, not $1,000.
The IRS maintains that e-filing your tax return lowers your risk of audit because it dramatically reduces errors. In fact, there is a 21% error rate when paper filing veruses 0.5% when filed electronically.
#4 Failing to Report Income
Large unclaimed cash deposits for services performed, but excluded for your tax return can put you at risk for audit. Excluding Form 1099 income is also a red flag. Keep in mind that the IRS already knows about your 1099 income so do not omit it from your tax return.
#5 Schedule C Losses
Do not include personal expenses when listing your business losses especially if they do not relate to your business. These are suspicious business losses and will arouse the IRS’s interest.
#6 Claiming Too Many Expenses
You want to make sure that the expenses you claim are ordinary business expenses and necessary to your business. Only claim the expenses that are necessary to your line of work.
#7 Home Office Deductions
The home office deduction is for small business owners who use part of their home for business. Only claim the portion of your home that was used 100% for business and do not try to claim more than the cap. In order to avoid an audit, make sure review the rules and restrictions of the home office allowable deductions.
#8 Incorporate if You Are Self-Employed
A Schedule C can raise a red flag if you are self-employed. You may want to consider incorporating or forming an limited liability company (LLC). Both are audited less often and allow more deductions.
The best way to avoid audits is to have your tax return prepared by a professional. An accountant will be able to advise you on areas that may trigger an audit and guide you through allowable deductions.