I try to keep good financial records, especially as I prepare for the end of the year when I want to calculate my finances (earnings and expenses) for my taxes. Is it a fun process? Absolutely not. But it does pay off, at least from an organizational stand point, to keep track of everything related to the blog. If I should venture further into working at home, which I plan to next year, I’ll up my game a bit when it comes to keeping track of finances. But, even if I’m incredibly prepared (or at least as prepared as possible) a tax audit could still be a possibility. Sure, it’s never happened to me but that doesn’t mean that it couldn’t happen to me in the future. Because of that, I wanted to start looking into how to avoid a tax audit. Taxes are not my favorite thing to begin with so the less I have to deal with the IRS, the better.
What is a Tax Audit?
First, why don’t we talk about what a tax audit is. I know it seems like an intimidating topic and while it may not be a picnic, it’s a potential situation that some may find themselves in.
Tax audits happen so the government can check, review, and inspect, the accuracy and compliance of citizens in filing their necessary taxes. There are various kinds of tax audits, but for the purposes of this article, we will narrow the discussion down to the income tax, which is filed by individual taxpayers and is audited based on his business or profession.
Tax audits exist to ensure that given the taxpayer’s income, he or she has paid his taxes accordingly. These audits are done in an attempt to close in the “tax gap” — i.e.the gap between the tax that should have been collected versus how much is actually collected.
More often than not, being subject to a tax audit is a result of mistakes that could otherwise have been avoided.
How to Avoid Being Audited
Honesty is the best policy.
Be honest and declare your income correctly. And declare all of it. For bloggers, this also means any products that you may have received throughout the year. You should declare your salary and the benefits you have. This is for the declaration of your wages and tax deductions. For the benefits, check if you have the proper forms to be filled out that would enable you to declare medical benefits and other things that you get reimbursed for.
Apart from your regular wage, do not forget to declare sources of additional income. If you received extra income from a part-time job, you need to fill out a 1099-MISC. If you received earnings from your investment, you should complete a 1099-INT. Failure to do so can create discrepancies in your record, flagging the IRS to subject you to an audit.
If you gave to charity, you should also declare those since those are valid for tax deductions.
Be clear and double check.
It is better to double check and get things right the first time you file your documents, rather that have to go through the hassle of a tax audit. The stress and the anxiety that comes from being audited can be avoided through extreme vigilance.
One of the most common errors that the IRS often spots is miscalculations. This can be avoided by using the proper tax software program that will properly and automatically compute your taxes. Often, credits and special deductions can make the calculations challenging. The best way to go about this is to double check your numbers. There are several tax computing software programs available in the market which you can try for free. For extra caution, you can try these even if you have plenty of time to file taxes. This way, you’ll know what you have to work with and not feel the pressure of cramming everything in at the last minute.
Some common mistakes also include the improper identification of filing status. Making an error in this can affect your total tax bill. If you were single and just recently got married, make sure it is reflected. If you are not sure of your status due to complications in your relationship, it is best to check with your lawyer on how to go about it.
Apart from the numbers and status details, you should also check if you have all the names and spellings right. Check if the names you noted match the tax identification numbers that are filed under the SSA or Social Security Administration. Moreover, you should check if you entered the right Social Security Number since a lot of official documents refer to this number such as income statements, and your retirement plan contributions, if any.
Preparing for a Tax Audit
The best way to prepare for a tax audit is by staying informed. Keep a checklist of the tax audit requirement reports. You must also keep note of the due date for filing of your taxes. These things are crucial to making sure you establish a credible and responsible tax payer’s record.
You should also regularly check publicly available bulletins from the government, so you are aware of announcements or changes in the requirements.
Keep your records clean.
It is important to have the habit of keeping clean records. A proper filing system that is fit for the make-up of your business will be beneficial. This way you can easily check what you need should you be subjected to an audit. It is best to keep past tax reports and other documents. Basically, it helps to make sure you have a clean record of all the income and expenses of your business for federal tax purposes.
The IRS does not accept electronic records so make sure you have aligned with your auditor on the validity of the records you have.
Contract professional assistance.
Given that the tax audit is conducted by a chartered accountant, it is best to hire a professional accountant — a CPA or tax attorney — to prepare your numbers for you and help you go through the requirements properly. This way, you can be prepared and your answers are correct. Moreover, having a lawyer helps to ensure that you divulge sufficient information during the audit, no more no less, in case you end up providing unnecessary information that might cause even more questioning.
Know your rights.
It is best to know your rights during your audit. Here are some of the publicly available rights you should know about:
A right to professional and courteous treatment by IRS employees
A right to privacy and confidentiality about tax matters
A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided
A right to representation, by oneself or an authorized representative
A right to appeal disagreements, both within the IRS and before the courts
The extent to which these rights apply to you should be discussed with your lawyer.
Have you ever undergone a tax audit? What advice would you share for avoiding being audited?