5 Tips To Avoid An IRS Tax Audit
Tax season is fast approaching and one thing is certain: nobody likes paying taxes. However, paying taxes is a walk on the beach compared to getting audited by the IRS. What is an IRS audit? If the IRS suspects that you have not filed your taxes correctly, either purposefully or mistakenly, they might decide to take a close look at your tax returns. Additionally, the IRS has a computer program that randomly selects tax returns to closely examine. This close examination is called an IRS audit.
Unless you willfully cheated on your taxes, the only punishment you will face (other than having to possibly pay more taxes) is having to deal with the IRS. This can involve a lot of annoying questions and correspondences. Who wants to deal with that?
There is no way to avoid getting randomly selected for an audit. However, there are ways to avoid raising any red flags which might lead to a full blow IRS audit. Here are five red flags you should know about to help reduce your chances of being audited.
1. File Your Taxes In Full And On Time
The easiest way to avoid arousing the IRS’s suspicions is to fill out all of the appropriate forms in full and to file your taxes on time. Missing the tax deadline or sending incomplete returns are clear signs that you don’t have your act together or that you are trying to hide something. The best way to avoid this red flag is to prepare ahead of time for tax season. Make sure that you have all of your pay stubs and W-2s, bank account and investment statements and other important tax documentation organized well ahead of the April tax deadline. Keeping good records will help you to do this. Also make sure that you are aware what tax forms you need to fill out. If you are unsure, consult a tax professional.
2. Don’t Make Math Errors
Another surefire red flag is making math mistakes. They are easy to make and even easier to overlook. Double check all of your addition and subtraction before submitting your return. Have a friend or family member take a look as well. While math errors rarely result in full blown audits, it’s worth it to take the time to double check your math so you don’t have to deal with the IRS at all.
3. Beware Of Crooked Or Incompetent Tax Preparers
If someone else prepares your taxes, then you are trusting them to submit your returns according to the letter of the law. However, not every tax preparer is created equal. Some are not sufficiently qualified. Others have no moral qualms about bending or breaking tax laws to reduce your taxes or get you a larger return. Make sure that you do a thorough background check on your tax preparer if you use one. Beware of promises of large returns. If you suspect that your preparer is doing something illegal, you should report her to the IRS and find a new preparer immediately. Remember that the IRS will hold you responsible for fines and penalties that result from inaccurate or illegal reporting on your report, no matter who filled it out.
4. Report Your Assets Held In Foreign Countries
Everyone has heard about Swiss bank accounts. But if you have one or hold financial assets in a foreign country, you need to report those holdings to the IRS. The federal government has taken a recent interest in cracking down on people who do not report offshore assets. In fact, several foreign financial institutions have recently disclosed the identities of American account holders to the US government. If your name pops up on one of these disclosures, you can almost guarantee that you will be audited and you might also face significant fines and penalties. The bottom line is, disclose your offshore accounts.
5. Follow The Rules For The Home-Buyer Tax Credit
If you purchase a house, then you might be eligible for the home-buyer tax credit. This credit can result in thousands of dollars in tax savings. Because of this large tax savings, the IRS is very concerned about people who try to inappropriately claim this credit. If you claim the home-buyer credit, make sure that you submit all of the appropriate paperwork. If you submit incomplete paperwork, you will increase your chances of audit.
Also, note that the IRS has ways to find out if you did something to void the tax credit. This includes selling your home shortly after you bought it. If you claim the home-buyer tax credit and then sell your home within three years of the purchase date, you will also increase your chances of being audited.
Getting audited is a drag. Although there is no foolproof way to avoid an audit, there are things you can do to reduce your chances of being audited. Remember these red flags when submitting your taxes in April.