Five Tips for Avoiding IRS Audits

According to the Internal Revenue Service, IRS audits were up 11% over 2010 figures. There are a number of reasons for this. The first is that during hard times, when taxpayers struggle financially, honest citizens are sometimes forced to cut corners and try to pay a little less in taxes. Additionally, as revenue goes down for businesses so does the government income from taxes, which prompts them to seek out income by increasing audits scaring taxpayers into compliance.

While there’s no foolproof way to avoid an audit, seasoned tax professionals all agree that there are several strategies to avoid audits, especially for self-employed individuals and business owners, who tend to be targeted by the IRS:

1. Be completely honest. Report all income, even when you don't get a 1099 or W-2. Deposit all cash income into the business account. Don't use cash to pay expenses. IRS agents that see this will make the case easier for unreported income and the burden of proof is on the taxpayer. Don't take deductions unless there’s a paper trail and you are clearly entitled to the deduction.
2. Keep good records. Of course this is something you should have done throughout the year, but you can still heed this advice for the coming year. Keep your receipts, especially for expenses you deduct. You will be asked for them on audit. To deduct actual mileage you must keep a "contemporaneous" log, not a reconstruction weeks afterward. Get invoices for any payments you make. Deposit all your income into an account and pay your bills out of that account or designated credit cards. If you're self-employed, or have a side business in addition to your employment, do NOT commingle income and expenses of your business with your personal. Keep and use separate accounts, ATM cards, and credit cards for your personal transactions and your business transactions.
3. Use the corporate account to pay for corporate expenses. Personal merchandise and services, such a car used for the personal errands for the owner, non-business meals, vacations, home improvements, etc., should not be expensed. IRS and the state tax agents know the difference. If it's personal, report it in your personal income tax return or reimburse the company and make sure to give it only the correct tax treatment as compensation, or dividend, in consultation with your accountant.
4. Use a competent tax preparer. Tax laws change every year. The person preparing your return should have credentials (education and experience). Mistakes, including math errors, in one part of the tax return increase the odds that the whole return will be audited. Don't pick choose because they promise to get you the biggest refund or the lowest tax bill. That's a red flag for fraud.
5. Pay taxes on time. Many get into tax trouble because they don’t pay estimated taxes during the year and don't have the cash (or available credit) to pay when they file the tax return for the year. Had they paid estimated taxes during the year, this would have been avoided.