Avoiding a Tax Audit

Last week we talked about some of the things that might trigger a tax audit.  If you missed that video, we’ll have a link for you in the description. Sometimes, being audited is just pure random chance, but as mentioned in that video, your odds of being audited can go up significantly if your tax return is too dissimilar from other returns, if your deductions are higher than normal, or if your income changes drastically. 

OF course, there’s no guaranteed way to avoid a tax audit, but there are some things you can do that may reduce your chances of being called for a summit meeting with the Great and Powerful Oz. 

Probably the best thing you can do is to be honest with what you’re claiming and deducting.  That would seem to be obvious, but it’s not uncommon for people to try to push the envelope as far as they can in order to get the biggest deductions or refund. Remember, though, there’s a big difference between tax avoidance, which is legal and often an excellent strategy, and tax evasion, which is illegal and of course never a good idea.  Think of it this way: if you don’t want to pay the toll on a particular highway, which is a type of user tax, you can simply choose to take another route on a different highway that doesn’t cost anything.  That’s a form of “avoidance”.  But if I crash the gate doing 98 — that is tax evasion.  So keep it legal and keep it honest. 

Another way to potentially avoid an audit is to file a return each year. Under normal circumstances, if you don’t owe any taxes, then there’s no penalty for not filing. But it actually may be a good idea to file one anyway, because if the IRS algorithms notice you’ve filed every year and then suddenly you don’t for this tax year, that could at least lead to an inquiry, if not an eventual audit, depending on what they find. 

Along those lines, it’s important to file on or before the due dates.  The IRS tends to get a little bent out of shape if you file even one day late, so it’s best to get your return filed on time.  If you don’t have the money to pay what you owe, send in what you can before the deadline and set up a payment plan, and at least avoid that situation. You can always amend your return at a later date if you have to. That’s not the ideal situation, but it’s better than not filing on time. 

And if you’re going to use the services of another individual to do your taxes, be sure to use a reputable tax preparer. It might be tempting to go with the person who tells you they can get you the biggest refund, or with the one who promises you the lowest tax bill. Always be skeptical of those. Look for someone who is either an enrolled agent, or a CPA. Generally, the good ones will know all about the most current tax laws, they’ll know what deductions you can and cannot take, and they won’t make promises to you ahead of time about how much you’re going to have to pay in taxes. 

One last thing (and this is important): if you’re picked for an audit, the IRS will ONLY contact you via the US Postal Service – the regular mail.  If you get a phone call, text, or you get an email from someone claiming to be from the IRS, it’s very likely a scam.  Just delete it, or hang up. For an actual audit, gather all the documentation for the return in question, and be sure to respond in a timely manner to all requests and inquiries.  If you’re mailing them information, be sure to get a confirmation of delivery. 

As scary as an audit sounds, remember that the percentage of audited returns is very small.  If you follow the advice I’ve given you here, chances are good that you won’t have much to worry about.  If you’d like to know more about what you can do to help manage your taxes and avoid paying more than you should, just give us a call here at Lucia Capital Group.  We do this every single day for our clients, and as always, we’re here to help.