4 Ways to Avoid a Tax Audit

Staying Out of IRS Radar Key to Avoiding Inconvenience

Getting audited by the Internal Revenue Service is nothing to write home about. Not only do you have to open your books to an IRS agent, you might have to hire a tax attorney to keep that agent at bay.

But staying out of the IRS’s radar is key to avoiding a very inconvenient and time-consuming audit. Here’s a few tips to staying free of IRS scrutiny.

Watch your transactions: The financial transactions you make are an indicator as to whether the IRS will want to audit you or your business. For instance, currency transactions are an IRS red flag for auditing purposes. You may not report your currency exchange transaction to the IRS, but there’s a good chance that the bank will. That conflicting information leads IRS agents to want to know what else wasn’t reported, and then an audit ensues.

Report all of your income: Failing to report all of your income is a surefire way to trigger IRS interest into your finances. The IRS is taking all the steps they can to detect unreported income. Its Automated Underreporter Program helps recoup billions of lost tax revenue from millions of taxpayers each year. It compares information submitted by an individual taxpayer with information with payments made to that taxpayer reported by third-parties.

These programs are used to research both individual taxpayers as well as businesses, and if a red flag pops up, an audit could be in store. In 2012 alone, the IRS issued roughly 4.5 million red flag notices, with an average of more than $1,500 in extra taxes for each notice.

Run – and profit from – your cash-based business honestly: Making large cash payments can seem convenient. You can avoid using your credit line to take out car loans, for example, and most businesses prefer cash anyways. But making too many large cash transactions can tip off the IRS.

Cash payments exceeding $10,000 are likely to be reported to the IRS. They’re typically reported by car dealerships, casinos, and banks, among other businesses. Financial institutions know when suspicious financial activity is afoot, and they have special protocols in place to report them to the authorities.

The IRS appreciates these tips because they can lead to cash-based businesses that are often the source of underreported income. Once the IRS finds out, their agents learn more about that business, its practices, and its resulting tax burden. To avoid an audit, adopt practices that keep large cash transactions to a minimum and have your cash-based business work with a tax professional to help prevent back tax debt.

File an accurate tax return: Are you making mistakes on your tax returns? That’s a key ingredient for the tax audit recipe. Filing an accurate tax return helps to prevent extra scrutiny among the millions of other tax filings filed each year.

For starters, keep and maintain all important records. These can prove-up your deductions and credits. Also, if you’re hooked into the digital age, filing via e-file is a sureshot way to prevent simple mathematical errors that lead to discovered discrepancies. If you have assets and finances stored overseas, make sure to report them as well. International financial assets exceeding $10,000 have to be reported to the feds, and securities, for instance, also have to be reported. Work with a tax professional to stay within the law.

Making more money leads to greater financial freedom, but it can also lead to an audit. If your income exceeds $200,000, your chance of getting audited is about four percent. Less than $200,000 and it’s one percent. But going through an audit is a painstaking experience, so make sure to work with a tax professional and avoid audits that result in back tax debt.