The US Internal Revenue Service organizes audits and examinations on tax returns to ensure tax compliance by both individuals and businesses. But because it’s virtually impossible to actually audit and examine every ITR for discrepancies, the audits are mostly randomized so your chances of getting picked for a particular year is just as high as getting overlooked. Many taxpayers manage to survive every tax season without undergoing an IRS tax audit but there are those that are not as lucky.
The audit selection process
What are the odds that you will get picked anyway? The IRS selects participants for audits through a number of methods. For instance, an IRS examination may be conducted on returns that are linked to individuals and corporations that have already been reported for tax avoidance transactions. Large corporations, on the other hand, typically undergo audits for their Form 1120 every year. There are also those that come up as a result of information matching in relation to payer reports or those that have been involved with transactions with other individual taxpayers or business partners that have also been picked out for the audit.
To ensure that you survive the IRS tax audit practically unchanged, you want to make sure that your Form 1040 is always accurate. The IRS offers a number of opportunities for tax breaks but you are responsible for keeping your records updated in case the IRS requests for proof of your deductions. It would be easier to prepare your return for potential audits if you keep your records properly organized throughout the year. This will help you establish a proper defense in case the IRS actually challenges this year’s return.
Here are some tips on how you can survive the IRS’ tax exam and keep yourself out of trouble during the audit in case you do get picked.
- Keep at least three years’ worth of your tax returns and related records
- Don’t throw your checkbook stubs
- Categorize your receipts from your purchases made the whole year
- Track the costs and the basis for expenses incurred when you make taxable investments or for various investments
- Keep your deductible items in a journal and make sure to record them as they occur
- Save your bills and proof of payments accordingly
These are actually the same tips that you need to take note of to make it easier for you to get your Form 1040 in order so even when you don’t really get audited, it would still be in your best interests to follow these guidelines.
As earlier mentioned, many large and multinational conglomerates undergo IRS examination every year so keeping their affairs in order is practically like second nature. But for smaller companies, there’s always the chance that you will get overlooked. But before you get too complacent, you want to take note of certain elements in your Form 1120 that could actually attract the attention of the IRS and merit an audit.
- Large deductions for charity
- Too many business expenses incurred and reported
- Excessive deductions that were itemized
- Prior tax issues
- Complex transactions for investments during the year
- Tax shelter losses
How to deal with your audit
If you suddenly find yourself chosen for a tax audit, it pays to be prepared for it. What you need to do is you need to go over the details of your return and make sure that you understand it so you can effectively answer the questions that IRS may throw at you. It would also help to seek the help of a licensed tax professional. Mike Habib, for instance, can help you go through tax audits so you don’t have to deal with the IRS on your own.
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