The most fearsome collection agency in the world is certain that some people are not paying what they owe. The Internal Revenue Service can collect liability for back taxes owed by taking bank accounts, wages, houses, cars, and other possessions. The IRS message is that it’s okay to utilize all the income tax deductions you’re entitled to, but don’t understate your income. You will be caught. However, there are steps you can take to avoid an IRS audit.
In the last government fiscal year, $5.5 billion of the $12.2 billion IRS budget was allocated to enforcement activities. The IRS audited 1.11 percent of all tax returns filed. However, tax returns with business interests having gross receipts of at least $25,000 were twice as likely to incur an IRS audit. If your income is $200,000 or more, you have nearly a three percent chance of being audited. Over six percent of tax returns reporting at least $1,000,000 of income were audited. The higher your income, the more careful you have to be about claiming income tax deductions.
The likelihood of an IRS audit is increasing, and more than ever the IRS is trying to find and collect back taxes owed. They are time-consuming and frustrating, particularly when business records are investigated. There’s not a sure way to avoid an IRS audit, but there are steps you can take to limit being singled out.
First, choosing a tax return preparer carefully is key. A National Taxpayer Advocate report indicates that 60 percent of individuals use paid preparers. The percentage is even higher for tax returns with business interests. The IRS has increased its scrutiny of tax return preparers. They are now required to pass a competency exam and register with the IRS. This improves IRS ability to identify tax return preparers involved in audited returns where errors were discovered. If the IRS believes a particular preparer is engaged in consistently fraudulent actions, all of the returns completed by that preparer are at risk for audit. It will be hard to avoid an IRS audit if you don’t spend some time research and choosing a tax return preparer.
Then, exercise extra effort to provide complete information. Make sure all the questions are answered on every tax form. Any missing information triggers a more extensive examination of your tax return. Add statements when necessary relating to inapplicable sections. This is especially important if the figures on your tax return don’t match income reported by parties who paid income to you. Profitwise has systems in place to identify and address issues like this. Give us a call to learn more about what we do to minimize your risk of an IRS audit.
About the Author
David Heistein, CPA
Dave is co-founder and managing partner at Profitwise Accounting. Dave is a Certified Public Accountant in the state of California, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.