Avoid Tax Audit, Tips 4, 5, & 6 (of 10)
From our series of the top 10 ways to avoid a tax audit, we thought we would go into greater detail as to how our list was created and delve into each suggestion. Today we will address the top three tips from our article posted a few weeks ago. The list was created by culling together various lists from various experts. For example:
Tips 4, 5, & 6 ways to avoid an IRS audit from GROCO.com’s article; “7 simple strategies for avoiding an IRS audit”:
- Avoid unreasonable deductions and keep track of all of them
- Try to avoid fluctuations in your income
- Don’t make too many charitable donations
From LegalZoom, here are their top tips numbers 4, 5, & 6:
- Be on Time
- Avoid Amending Returns
- Match up all your paperwork
From Forbes, their top tips numbers 4, 5, & 6:
- Call Home
- Go Through Your Mail
- Be Thoughtful About Your Deductions and Credits
From WSOC-TV, Charlotte, NC, their top tips numbes 4, 5, & 6 of 10 tips from Action 9 to Avoid IRS Audit as Tax Due Date Approaches:
- Be careful with claiming your car as your office
- Accurate reporting of spending and earning
- Be careful with medical and dental deductions
All these lists led us to our top ten article; and subsequently to the more detailed top 3 recommendations.
But here below are our top tips numbers 4, 5, & 6 explained in greater detail:
- If complex, seek professional help (ounce of prevention = a pound of cure)!
- File electronically
- Plan ahead to reduce income fluctuations and surprisingly large donations.
So, why is “If complex, seek professional help (ounce of prevention = a pound of cure)!” important?
Well, if you’ve ever heard a terrible story about a small auto repair done by a friend or someone that was “cheap” that knew a lot about cars, just not enough for your repair, who’s mistake turned out to be far more costly than the original repair, then you know.
Or the time a friend, with the best and kindest intentions tried to help with a home electrical or plumbing issue that resulted in a fire or flood, then you know. Sometimes, paying more for a professional (brain surgeon for example) is far more prudent than looking for the least expensive option.
Tax professionals typically fall into this category. If the car repair goes bad, you’re only out mechanic fees or at most, a new car. The IRS has power to pull funds out of your bank accounts and incarcerate. Like the brain surgeon, the stakes are much higher.
Notwithstanding, if income is relatively low, and it’s a simple W2 wage earner, then DIY, turbo tax or other free service is likely absolutely fine and safe. However, if complex, one saves money at their own risk when not engaging a professional.
Not to mention, if they are talented, the professional tax preparer (enrolled agent or CPA) might help you get a much larger refund using a perfectly legitimate tax strategy instead of boilerplate tax return preparation.
Using a tax professional is no guarantee, however, knowing your tax return was completed properly, and having a resource that can answer any question the IRS might have, greatly reduces risk. Further, if your EA or CPA knows the tax code better than the person across the table, better still.
Peace of mind even if you get an audit notice, will help one to sleep well at night, knowing their return was prepared properly.
Why file electronically? According to the official IRS website, there are 6 reasons to file electronically:
- It is accurate and easy. E-file software helps taxpayers avoid mistakes by doing the math. It guides filers through each section of their tax return. The software uses a question-and-answer format that makes doing taxes easier.
- It is secure. E-file meets strict security guidelines. It uses modern encryption technology to protect tax returns. The IRS continues to work with states and tax industry leaders to protect tax returns from identity theft refund fraud. This effort has helped to put strong safeguards in place to make tax filing a safe and secure option.
- It is convenient. Taxpayers can buy commercial tax software to e-file right from their home computer. They can also ask their tax preparer to e-file their tax return. Most paid preparers must file their clients’ returns electronically.
- Most e-filers get their refunds faster. When someone files electronically, there is nothing to mail and the return is virtually mistake-free. This means the fastest way for a taxpayer to get a refund is to combine e-file with direct deposit.
- It’s often free. Many taxpayers can e-file for free through IRS Free File. Free File is only available on IRS.gov. Some taxpayers may also qualify to have their taxes e-filed for free through IRS volunteer programs.
- Volunteer Income Tax Assistance offers free tax preparation to people who generally earned $54,000 or less. Tax Counseling for the Elderly generally helps people who are age 60 or older.
- There are several options for making payments. Taxpayers who owe taxes can e-file early and set up an automatic payment on any day until the April deadline. They can pay electronically from their bank account with IRS Direct Pay. Taxpayers can visit IRS.gov/payments for information on the other payment options.
Why should you “Plan ahead to reduce income fluctuations and surprisingly large donations.”? Remember, the IRS is a lot like a very large collection agency that enforces rules passed by congress. They don’t make the rules, but they enforce them.
They are tasked with generation the funds required for the entire US government, including its defense, to operate safely and well. This is an enormous task that requires diligently procuring money wherever they can.
As a collection agency, they are always looking for opportunities to collect more money. If something looks unusual, potentially fraudulent or just a mistake, it will garner attention often leading to an audit. If income is particularly large or the return complex, an audit is more likely.
Also, if there is an unusual event, such as a large increase in income or donations. All of these can be red flags resulting in an audit.
An expert tax preparer can often, using completely legitimate tax strategies, determine how best to properly report substantial fluctuations in income, deductions, and donations. Ideally, in such a way as to minimize red flags, and hopefully the likelihood of an audit.
But they also give advice on what to do, say and not say when communication with the IRS.
We hope you found this article about “Avoid Tax Audit Tips 4, 5, & 6 (of 10)” helpful. If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or our website at www.GROCO.com. Unfortunately, we no longer give advice to other tax professionals gratis.
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Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
Alan L. Olsen, CPA, Wikipedia Bio
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