A tax audit can be intimidating, nerve-wracking, and downright scary — but they don’t have to be. When it comes to audits, knowledge is an advantage. To help with that, we’ve compiled these audit avoidance and defense tips.
Know The Red Flags
The IRS is a huge organization that relies on prioritization to run smoothly. As such, rather than examining every case with a fine tooth comb, the IRS tends to focus on “high-risk” cases. Do you keep offshore accounts and trust funds? Did you file multiple tax exemptions? Have you flat-out not filed a tax return? Then be prepared, because an audit is more likely to come your way.
Know Your Company
When it comes to the IRS, the best offense is a good defense. Are you up-to-date on your company’s financial transactions? Have you analyzed expense reports for legitimacy? Are you aware of which deductions are available to you and your company? Do you have third party options to validate expenses not covered by a receipt? These are all things to think about — and things the IRS expects business owners to do.
Know Your Mathematics
Even the most experienced financier can make a small subtraction slip-up, but few things send up a red flag faster than a major miscalculation. Whether you have your taxes done or you do them yourself, get a second opinion from a fresh pair of eyes. A proper report now will save you heaps of trouble down the line.
Know Your Means
It’s as simple as it sounds. The combination of “living large” and wonky tax returns almost always triggers an audit. The IRS can check yearly income against your living expenses, and use your testimony against you. So make sure you can prove that you’ve been living within your means.
Know Your Deductions
Deductions are the most precarious part of filing a tax return. Left open to relative subjectivity, frivolous (or downright fraudulent) deductions are the most common method for cheating the system. Even if your deductions are 100% legitimate, unusually high or expensive items might be enough to raise a red flag for the IRS. Your best line of defense is to document everything: keep your receipts, show your calculation work, and make sure you file the correct forms.
Know Your Position
Taxes can be especially tricky for independent contractors: not only are there extra forms to deal with, but tax auditors may reclassify you as an employee of a company and attempt to collect unreported payroll taxes (plus penalties and interest). Through effective use of forms and the 20-Factor Test, however, these types of audit claims can be defeated.
Know What NOT to Say
Think you got one over on the IRS with your deft maneuvering? You would do well to keep that information to yourself. The IRS rewards informants with a share of the extra fees collected, so don’t be surprised if you find yourself slapped with an audit. If that interview does come, know that auditors don’t take kindly to cute excuses. Flippant, vague answers could be used against you later as criminal intent toward tax evasion. Choose your words wisely.
Know Your Rights
So, you were chosen for an audit? You will be interviewed, and you will be scrutinized. That said, you are not entirely powerless. According to Section 3503 of the IRS Restructuring and Reform Act of 1998 (RRA 98), you have the right to know why you’re being audited. You also have a right to record your interview, ask to transfer your case to another area, and even file a misconduct report if your auditor acts out of line.
Know Your Opponent
A common mistake among individuals facing an audit is to underestimate the intelligence of their auditor. People like to rib them with names like “bean counter,” but rest assured, this is your auditor’s career. It took years of intense schooling and experience in accounting and auditing to get to this point, and along with that sort of practice comes an innate savvy for getting the job done. They’ve seen and dealt with it all. If you haven’t, or just aren’t sure, your best bet is to get a professional on your side: the tax attorney.
Know Your Tax Attorney
Doing taxes can be frustrating and confusing. Even reading these tips may leave you with more questions than answers. And that’s all right – because that’s what tax attorneys are for. A good tax lawyer will prepare you for every possible aspect of a tax audit and aggressively fight on your behalf. A good tax attorney knows how to speak an auditor’s language; we have the right answers and know when to stay silent.. Whether you’re trying to navigate a tough audit or simply avoid one, an experienced tax lawyer can guide you through the process.
Contact us to schedule a tax attorney consultation. Give us a call at 847-580-1279 to schedule a confidential consultation.