In the minds of the IRS you are guilty until proven innocent when it comes to defending yourself from an IRS tax audit.
People who get audited have a time consuming and aggravating process to contend with. The very best thing to do is to avoid getting noticed by the IRS. The only problem is that when you file a schedule C with your 1040, one is more likely to be audited than are people with just w-2 income. In the fiscal year 1995 3% of all income between 25,000 and 50,000 were audited, compared with about one percent of 1040A returns reporting income in the same range.
Here are some ways to steer clear of holding a red flag for the IRS:
1. Deductions- Uncle Sam pays close attention to whenever a person claims a deduction. Some kinds are more questionable than others. The Home office Deduction is the most questionable of all. The space you run your business in must be exclusively set aside for that purpose. Otherwise it will not count. These rules are found in IRS Publication 587 ( "Business Use of Your Home : Schedule C Example).
2. Inconsistencies- Anything that looks different from the year before such as changing your name, or your spouse or children's names, or if you are suddenly taking new types of deductions, the IRS is likely to notice or inquire about them.
3. Disagreements- Between State and Federal tax returns also send a red flag warning. If you told the state one thing and the fed the other someone will start asking questions. There are also ways that other discrepancies can arise through things like 1099's from all the people who paid you and filed them. Because when a client sends you a 1099 they also send a copy to the IRS. You could run a high risk of being audited if the amount you submitted is lower than what is on the 1099. State and Federal governments share the same information.
4. Drastic Changes in Income- If you say you made 60,000 this year on your return but you only reported that you made 15,000 the IRS will start to look for the missing money. If they find the discrepancy there will be serious problems to deal with.
5. Round Numbers- Round numbers do not happen in real life very often. They shouldn't show up on your tax return either.
6. Incomplete or Sloppy Returns- Don't leave any blanks or file a sloppy return or you might have to explain your return in person.
7. Suspiciously Low Income- If one were to file a return of 19,000 when they live in the Hamptons there may be some explaining to do. Most tax returns are chosen by a computer that will likely yield a lot of money for the government. If there isn't that much tax money that the government can get the percentage of getting audited will go down.
Call Jim Gilland now for your FREE IRS tax audit consultation, 801-444-9302