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Avoiding an Income Tax Audit If You're a Small Business

There's some thing about just sitting down with an IRS income tax auditor that may get to even the most self-composed and mature men. The bad news is, in case you are self-employed, and your way of filing your tax return is always to innocently do it with a Schedule C, you're already on the IRS shortlist for an income tax audit. What did you do to deserve that? It is simply that you have been personality-profiled - they figure that anyone who runs a business, is bound to try to disguise particular expenditures as business ones, and claim deductions on them. They usually earmark 50% more auditors to audit firms as well as the self-employed pool, than they do for the salaried W-2 pool. But there is certainly still a good deal you are able to do, to maintain out of their sights.

The first factor you do, would be to use a top-notch accounting system on the personal computer. Superior nevertheless, would be should you had your taxes prepared by not someone in-house, but by a expert accounting firm. And whatever you use, it is possible to run your particular expenditures by way of it as well. The first factor that occurs whenever you sit down to an income tax audit is, the IRS agent looks as a result of all the deposits on your back accounts, both business and particular. If they discover more money in your bank accounts then you've documentation for to prove where they came from, you will have a bit of explaining to do.

As well as the flip side of which is, that if you ever do your own taxes, whilst skipping the experts and expert grade software program, the IRS feels that you are almost certainly not going to have done a great job, being an amateur at this and all, and will bring you in for an income tax audit. Did you know that the tax code runs to more than 10,000 pages? Their assumption that you possibly couldn't possibly have all that below your belt, can be a reasonable one. In case you are just worried about how expert CPA may charge you huge bucks, take into account how an income tax audit costs you large bucks as well.

There is certainly a pattern here, in case you would care to see it. They feel that the more homey and individual your business structure is, the more beneath suspicion you naturally are beneath. If you ever happen to be a organization, you are suitable away all more believable within the eyes of the IRS, and have less complications with an income tax audit. You could truly think about upgrading your business to some thing more businesslike - turn your self into an incorporated partnership or one thing. But more critical than any of these image difficulties you may well have of not applying the appropriate software program or looking like a "real" business, is the way you file your returns.

The rule for regardless of whether or not a deduction is reasonable, is always to ask your self in case you would have created the expense in question, in case you did not have a business. Some kinds of expenditures, draw a good deal more scrutiny. Car expenditures, come number one on their list. They assume you to help keep a detailed log of how several miles you traveled for worthy business purposes. Appropriate by means of the year. Basically, the income tax audit persons anticipate you to pull a fast one utilizing your business vehicle for private purposes. The more records you've in this area, the much better.

In case you claim to work from dwelling, telecommuting, as they call it, you'll almost certainly would like to charge for rent from your business for providing a house space for it. This is anything that the auditor will genuinely like to pick apart. Be positive you could have detailed records of how long you work from your property office each day, to make certain that they genuinely believe you.

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How to Avoid an IRS Income Tax Audit

What is an audit and why do individuals cringe at the word? The Internal Revenue Service issues audits as a regulatory measure to ensure that society is completing accurate tax returns. Sometimes they are issued simply to check on something that seems awkward or you might get picked for an audit simply because your number was picked. Avoiding an audit or decreasing your chance for an audit is quite easy.

First to avoid tax deductions, claim tax deductions that you are legally entitled to. If there are items that you are not sure about consult a tax attorney or tax professional - get legal advice about what specific deductions you are able to claim. If you do not have documentation to verify the claim of a deduction it is probably not a grand idea to go ahead and make the claim. Submitting documentation along with your return will assist in preventing red flags and avoiding tax audits.

The discrimination index function is a computer ran program that aids the Internal Revenue Service. Basically, your tax return is compared to the tax returns in the same income bracket. If any deductions or claims seem outrageous compared to others in your tax bracket - your tax return might be flagged for an audit. To help in avoiding a tax audit keep honest on your tax return and do not exaggerate any numbers. When ran through the discrimination index function you want your return to show up normal comparisons.

There are many things you can do to avoid tax audits. For example, first and foremost, keep track of all of your income. Keep copies of your W2's and 1099 forms, all receipts and any financial information that is relevant to the information submitted on the tax return. Keep all of this information organized, categorized and separated into specific years. Also, if you had help in preparing your return keep track of the contact information of the preparer that assisted you on the tax return. All of these above mentioned tips might not completely help you to avoid a tax audit but would surely be of help if you were chosen for an audit.

If you claim deductions instead of taking the standard deduction, any itemized listings that are exceptionally high for your income range might alert your return for an audit. To avoid a tax audit, keep honest and accurate with all of your charitable contributions especially. For example, please do not state that you have contributed $15,000 to a special organization if your annual income is only $35,000. This is not an action that someone would take it they are trying to avoid a tax audit.

It you are an owner or partner in a small business it would be in your best interest to try and avoid a tax audit. Filing a schedule C, which is required of small businesses, is tricky and complicated. If you are unfamiliar with taxes you should consult a tax attorney or tax professional. Avoiding a tax audit if you are a small business is almost next to impossible. The Internal Revenue Service is fairly certain mainly self-employed individuals try to hide or not report some of their income - this makes small business owners a target for tax audits.

Along the same lines of being self-employed, many individuals that receive a portion or all of their money in cash profits are a target for tax audits as well. To help avoid tax audits, be sure to keep all records of income either in a log book or computer program. Remember to report all income to the Internal Revenue Service and if your income is not currently taxed be sure to pay estimated taxes. These are also easy ways to avoid a tax audit.

If you are divorced both parties of the divorces wave a red flag for a tax audit the first few years. Be sure that you and your ex-spouse know which individual is claiming any dependent/s in the relationship. A child can only be claimed by one parent or the other. Many divorced couples work out a situation as to where the claiming years alternate. Also, if you are not in constant contact with your ex-spouse - be sure around tax season each individual knows who is claiming the dependent/s.

If you hold money or investments in off-shore or foreign accounts it is your responsibility to report the money produced and pay the appropriate taxes required for the funds. Holding off-shore accounts is legal but the taxes must be paid on them. If an individual does not report this off-shore income for any reason at all, criminal punishment can result.

The bottom line in avoiding a tax audit is simply being honest, accurate and filing in a timely manner. Keep organized and consult professional assistance whenever needed, especially if you have a specifically difficult filing situation.

Lydia Sweet is a contributing tax preparation expert for http://www.taxadvisr.com and has been working in the tax preparation field for 13 years. taxadvisr.com is a resource site for those preparing their federal and state income tax returns. Free E-File software, discussions, articles, reviews, forms and more can be found at http://www.taxadvisr.com