Despite what individuals may have been told in the past, an audit by the Internal Revenue Service (IRS) isn’t random. The IRS utilizes a state-of-the-art software program to flag tax returns for auditing. The software is called Discriminate Income Function (DIF). It flags returns for investigation by comparing the deductions an individual or business takes compared to others that are within the same income bracket.
There’s no reason taxpayers should be afraid to take the deductions to which they’re legally entitled, as long as they have the appropriate documentation to support what they’re claiming. There’s no foolproof way to be protected against an IRS audit, but there are steps individuals can take to minimize the potential.
Some jobs, careers, tax brackets, and geographical locations are more likely than others to be targeted for an audit, along with the very rich and the very poor. Individuals with an annual income of less than $25,000 have an audit rate of about 0.69 percent, a figure that’s 50 percent higher than all others.
Areas with a large African-American, Hispanic, Native American, and poor population are audited more. People that regularly receive tips such as hairdressers, waitresses, and bartenders are audited with more frequency, along with accountants, doctors, and attorneys that typically keep their own books. It’s a good idea for anyone in these categories to avoid miscellaneous deductions.
Self-Employed & Small Business
Small businesses and the self-employed are favorite IRS targets. Many choose to incorporate or form a limited liability company as they’re audited less often. File any pertinent worksheets, avoid amendments, know when to file, and hire a professional to prepare tax returns.
Know What’s Questioned
Keeping exemplary records is critical. Home office deductions, medical expenses, casualty losses, and business costs for travel, entertainment, and meals are some of the most often questioned.
Being neat really does make a difference. Returns that are difficult to read or have blank lines are more likely to be audited. It’s better to use a zero on a line than to leave it blank.
Do the Math
Use a calculator, double check the math, and make sure federal and state returns match. For those that use online tax preparation software, if it says there’s a problem and something needs to be revisited – pay attention.
At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs. We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!