How to Not Get Audited
It's tax day today and the chances of you being audited are pretty low, but you never know. The total of unpaid taxes has jumped to 30 percent in the last five years, so you may be paying your taxes, but one third of tax payers aren't so the IRS has to go after somebody. Here's how to make sure it's not you.
Be Careful Hiring a "Professional" - Most people don't need someone else to do their taxes for them, but if you do, the IRS has free help for you. If you'd rather go somewhere and have them done, choose wisely. Look for references and credentials. If the IRS thinks that the preparer is lying about the numbers, they could audit everyone who has ever had their taxes done by him or her. I know someone whose taxes were very complicated one year so they had a tax pro do them and the agency messed them up so much, they got hit with a 20 thousand dollar tax bill because of the error.
Business Before Pleasure - Always, always always deduct expenses related to a business. Relocation costs such as a moving truck, mileage and movers could be deducted. Money you spend chasing a hobby can't be deducted, so if you're thinking you can deduct those knitting needles and skeins of yarn, think again. Unless you're using the knitting needles and making a business to sell sweaters and scarves, it's not a business. Not sure? The IRS has an article that tells you the difference.
Incorporate - Self employed tax payers are ten times more likely to get audited if they file a Schedule C rather than an S corporation return. This is because people who are operating a hobby rather than a business file a Schedule C. If you're self employed and need guidance as to how to properly file your taxes, you should read How to Set Up Your Business.
Avoid Oversized Deductions - Another way to get audited is by taking deductions that look big compared to the income you claimed. The IRS says you can deduct up to half of your income for charitable donations, but it's a little tricky. The more money there is, the more likely it is that you're going to be audited. That doesn't mean that you shouldn't take all of the deductions you're supposed to, but you should be prepared to defend them.
Report All of Your Income - A lot of people don't know that any and all income regardless of the source is taxable. You won't get audited over your garage sale earnings, but if you win big when you're gambling, you will have to pay taxes on that. Same goes for money that has been reported to the IRS by someone else on your behalf. For example, if you do a medical study and get paid for it, you'll have to pay taxes on it. Same goes for investments and wages if you're self employed. Don't assume because you didn't get a form from the IRS doesn't mean that it wasn't filed with the IRS.
Take Your Time - Don't rush when you're filing your taxes. The more mistakes you make, the more your return is going to stick out and the more likely you are to get audited.
If you're paying in and filing a paper return versus filing online, don't forget to check the final collection times before you drop it in the blue collection box so your return is postmarked with today's date, otherwise it's considered late and you'll have to pay a penalty.
If you still have questions, visit the IRS website or call 1-800-829-1040.