Taxpayers are selected based on several factors, and business owners are never pleased when they are chosen for an audit. An audit occurs when tax officials review a taxpayer’s financial documents and returns to ensure compliance with the tax laws of a jurisdiction. Even though some audits are random, there are red flags that may increase your selection chances.
Therefore, it is of utmost importance to consider these issues while preparing your taxes to mitigate the chances of errors. For businesses in California, using tax preparation services in Campbell and Santa Cruz helps mitigate the risks and improve compliance.
Table of Contents
1) Excess Estimation of Charitable Contributions
Charity is good, but the IRS does not respond kindly when individuals overstate the worth of their charitable donations. Donated items should be appraised at their fair market value. Any item valued at $5,000 or more must be appraised, and the appraiser completes Form 8283. Remember, greatly exaggerating your appraisals could lead to an audit, so ensure your calculations are correct and properly substantiated.
2) Errors in Math
The most common practice that causes such issues is simple calculations. Inaccurate computations concerning capital gains, tax credits, or even interest paid may cause them to raise a flag. Check all the figures on your tax returns, or have a professional tax preparer check them. If you successfully do so, this can help prevent attracting unnecessary attention from tax officials.
3) Failing to Sign Returns
It seems like a minor issue, but it may invite an audit if you still need to sign your tax return when filing it. If you have a tax preparer, please ensure they write or attach their valid Preparer Tax Identification Number and sign the tax return. This ensures that your return complies with the basic minimum requirements for submission.
4) Reporting Income Incorrectly
Any amount not cited is written off and is a major concern. Every penny earned must be correctly and faithfully reported, whether total cash payments received, earnings from freelancing activities, or part-time jobs.
In the event of a discrepancy with the figures in Form W-2, Form 1099, or what has been received in cash payments, that inconsistency will result in a penalty being imposed on you. Ensuring you have adequate documentation of receiving all forms of payments should guarantee you avoid issues come tax time.
Tips to Minimize Audit Risks
Don’t mix personal and business deductions.
Blurring the line between personal and business expenses is a common mistake. Deducting personal travel or entertainment costs as business expenses can raise red flags. Familiarize yourself with IRS rules to ensure your deductions are legitimate and defensible.
Avoid Rounding Numbers
While rounding numbers might simplify calculations, it can make your tax return appear less accurate. Exact figures reflect precise bookkeeping, and inconsistencies caused by rounded amounts can raise a red flag for auditors. Taking the extra time to input exact numbers can save you from potential scrutiny and complications later.
Provide Clear Explanations
Be specific when categorizing business expenses. Vague labels like “miscellaneous” can create suspicion and invite questions from auditors. If you claim unusual deductions—such as less common business-related expenses—always include a clear explanation or supporting documentation. Transparency in your reporting helps ensure that your claims are seen as legitimate and well-justified.
File Electronically
Electronic filing is more than just convenient; it even lowers the possibility of errors. Online tax filing solutions often come with tools that automatically verify the accuracy of your data, minimizing mistakes that could trigger an audit.
Conclusion
While tax audits may seem daunting, they can often be avoided with careful planning and meticulous record-keeping. Partnering with trusted tax preparation services can provide peace of mind, ensure compliance, and reduce the likelihood of triggering red flags. With the right approach, you can focus on growing your business without worrying about an audit.
References:
- https://www.investopedia.com/articles/pf/07/avoid_audits.asp
- https://www.business.com/articles/16-tips-to-avoid-a-tax-audit-of-your-small-business-return/
- https://www.caclubindia.com/articles/top-10-red-flags-that-trigger-tax-audit-50287.asp