10 Crucial Steps to Avoid An IRS Audit

April 16th, 2014 at 8:11 PM

An IRS Audit is expensive, time consuming, and emotionally draining for starters. Its an experience you would like to avoid.

Here are the 10 ways to avoid an IRS Audit:

1. Keep Receipts and Invoices–These documents have really nothing to do with avoiding an audit, but they certainly are your best weapon in this warfare. Keep the best accounting records you can, if you cannot to do this , hire a bookkeeper or an accountant. The cost will pay huge dividends!
2. File Your Tax Returns–Even if you owe and cannot pay the Taxman, file your Tax Returns. This could be your quickest ticket to the IRS audit office, by NOT filing a Tax Return. Also, I recommend that you file a Tax Return even if you do not owe anything, or have no income. The IRS is like a boyfriend or girlfriend, if you don’t stay in touch, they assume the worst.
3. Be Aware of Industry Averages & Common Expenses–If you have your own business, that business category is indicated on your Tax Return. Expenses that exceed industry averages or are abnormal compared to your income are red flags.
4. Attach Additional Statements and Footnotes–When necessary, include additional information to substantiate a potential red flag item, such as charitable contributions. This may prevent an audit on that item, as the IRS reviewer has part of documentation required to support the deduction.
5. Avoid Schedule C–Reporting your small business on Schedule increases your chances of an audit dramatically, as compared to a Corporate Return. I recommend to all my clients to form an Corporation or Limited Liability Company and elect to file as a Corporation. This reduced your chances of an audit 10 fold!
6. Issue 1099’s —Request IRS Form W-9 from your independent contractor BEFORE they provide any service. If they are a non-corporate entity and receive in excess of $600, then issue them a 1099 by January 31 of the following year.
7. File All Related Payroll Tax Returns–If you have employees you MUST file all the necessary payroll tax forms. This is absolutely critical to your financial welfare. Non-compliance in this area not only will trigger an audit, but could actually subject you to jail-time.
8. Do Not Inflate Home Office Deductions–Use Form 8829 judiciously. “Pigs get fat and hogs get slaughtered.” This is not an area to get aggressive.
9. Avoid Round Numbers–This should be a no-brainer. This is a major red flag How many people actually spend $400 on office supplies in a given year? Be accurate and don’t forget Rule#1.
10. Avoid Deducting Excessive Dining, Travel and Entertainment Expenses–These expenses need to look normal and conform to your level of income. If you’re a sales rep, these expenses are ordinary and necessary for your business. If you’re operation an e-bay business out of your basement, I think not. Also, these expenses along with auto expenses need additional documentation in accordance with IRS Code Section 274.