Helpful Tips To Avoid An IRS Audit

While it is true that the odds of being audited by IRS are extremely low at 1%, it is still important to be proactive because interests and penalties can add up rather quickly. IRS uses an automated system to come up with targets that they send letters to. Resolving your IRS problem is pretty straightforward because you only need to show proof of a deduction or an extra payment made.

However, you will need a tax professional if the IRS discovers a major problem in your tax returns. If you want to avoid going through an IRS audit, make it your individual responsibility to report and pay what you owe in taxes. The US taxation system is based on voluntary compliance but don’t believe the myth that if you do not file a return, IRS will not find you. Even if the funding of IRS has been drastically reduced, it still has tremendous resources and investigative powers.

If you avoid paying income tax it can result into heavier penalties. Penalty for failure to file is 5% per month of the unpaid tax with a maximum of 25%. If there is a potential criminal action, you may end up paying a maximum of $25,000 in fines and jail term.

The odds of being audited increases if you commit errors in your tax returns. Online tax software can reduce your mistakes but there is still the human error to contend with. When entering data, always double check entries to avoid costly errors. Round numbers are big red flags and can easily get the auditor’s attention.

If you are earning hefty amounts of side income, remember that IRS knows that money is often being left on the sidelines. According to a 2014 research of American University, 2.5 million taxpayers have earned income through sharing economy jobs. IRS can be more aggressive when auditing this kind of situation.

Accounting firms usually offer tax audit insurance to their clients to cover the professional fees arising from a tax audit. Tax professionals usually provide services to individuals who are required to respond to a tax audit and investigation and they have to be indemnified properly.