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15Feb 2014

10 tips to avoid an IRS audit

There’s no guaranteed way to avoid an audit of your tax return, but there are steps you can take to reduce the risk.

1. Pick the right pro

Many people don’t need to hire a tax professional. Free professional preparation is available for those making $51,000 a year or less. But if you do decide to pay for help, choose wisely: If the IRS suspects a tax preparer is routinely fudging numbers, it can audit all the preparer’s clients. At MBS Accountancy, technical excellence is a priority. We consistently strive to meet and manage client expectations.

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2. Put business before pleasure

You can and should deduct expenses related to a business, including for home office use if it applies. But expenses related to hobbies aren’t deductible. The difference: A business makes money. From the IRS page called “Is Your Hobby a For-Profit Endeavor?”: “An activity is presumed for profit if it makes a profit in at least three of the last five tax years.”

3. Consider incorporating

According to The Wall Street Journal, the self-employed are 10 times more likely to be audited if they file a Schedule C rather than a corporate return.

4. Avoid outsized deductions

Another red flag is taking charitable deductions that look big compared with your income. In general, the IRS says you can deduct up to half your adjusted gross income. But the rules get complicated, and the bigger the deduction, the higher the audit odds. That doesn’t mean you shouldn’t take all the deductions you’re entitled to; it just means you should be prepared to back them up.

5. Take your time

Don’t rush through your taxes. The more mistakes you make, the more your return sticks out.

6. Make less

Bank robber Willie Sutton was credited with saying he robbed banks “because that’s where the money is.” The IRS has a similar philosophy. Last year the odds of an audit went up sharply for higher earners. Audit odds for those making more than $200,000 were about 4%, and for those making more than $1 million, more than 12%.

We’re not seriously suggesting you take a pay cut to lower your audit risk. But the more you make, the better prepared you should be.

7. Be careful with the earned income credit

The IRS doesn’t focus only on the rich. Folks claiming the earned income tax credit — available to low- to moderate-income working individuals and families” — can also invite scrutiny. More than 27 million people claimed the credit last year.

Because the credit is refundable — meaning the government will send you a check even if you paid no taxes — it’s ripe for abuse. Definitely take it if you’re eligible, but make sure you are.

8. Report all income

Many people don’t realize that income from almost any source is taxable. You may not get caught on yard sale profits, but you might on gambling winnings. And for income that’s been reported to the IRS by someone else — like investment and self-employment income — you almost certainly will.

Don’t assume that because you didn’t get a copy of an income-reporting form, one wasn’t filed with the IRS. If your W-2, 1099, or other tax form hasn’t shown up by now, call the company that’s supposed to be sending it.

9. E-file

It’s true that the IRS uses computers to analyze returns for potential audits. But it’s not true that e-filing increases your risk. In fact, the IRS says the opposite: When you e-file, “your chance of getting an error notice from the IRS is significantly reduced.”

It’s easier, cheaper, safer and gets faster refunds. There’s no good reason not to file electronically.

10. Be careful with state returns

Federal and state governments communicate, so if you get audited by one, expect to hear from the other. That’s a good reason to take just as much care in preparing a state return as the federal one.

Originally posted and shared from: http://on-msn.com/1nK5pXV, Stacy Johnson, February 20, 2013 5:03 pm