How Can I Avoid An Audit? Do You Have Any Tips?
Question: How Can I Avoid An Audit? Do You Have Any Tips?
CPA, attorney, author and entrepreneur Shannon Nash provides 9 ways to avoid an audit:
Answer:
Do you always feel like “Somebody’s Watching Me”; even the IRS (Rockwell, featuring Michael Jackson, 1984)? For the record, an IRS audit is nothing to get worried about if you have accurate records and have performed all your filings properly. That being said, truth and perception may not always be consistent.
Below are suggestions for preventive steps to lower the likelihood of you being audited.
Make sure to report any and ALL income. Any income or expense that the IRS requires a third-party to verify by filing Forms 1099, 1098, 941, W-2, etc., are computer-matched during processing. Double-check these figures before you file your tax return. It is good to keep copies of all checks received (cash receipts) to verify that your year-end statement is accurate.
Review your tax return for simple mistakes before you file it, (like checking your total salary number against the amounts listed on Box 4 of your W-2’s). Also, make sure all of your calculations, personal contact information and social security numbers are listed correctly on your return.
The home office deduction has historically been one of those areas where it seems like the IRS is saying “No, No, No, No, No” while you’re saying “Yes, Yes, Yes, Yes, Yes” (Destiny’s Child, 1997). It is one of the red flags that may cause an audit. If you deduct the costs of your home office, the key is Documentation! Be able to prove that this is truly your primary office (i.e., it’s a separate room in your house, the place where you meet clients, etc.) Also remember, indirect expenses (those that apply to the entire house) must be allocated, but you can deduct all of the direct expenses (those that apply only to the business space).
Keep personal and business bank accounts separate; otherwise you’ll be saying “How Will I Know,” (Whitney Houston, 1985) which expenses to claim as business deductions and which ones are personal? Mixing use of accounts will generate more questions and may expand a simple question to a full-fledged search.
Pay for all business expenses with a check or credit card, segregated for business. The IRS auditor is looking for a payment trail when reviewing your accounts. If the IRS auditor does not see routine expenses paid out of the account, it may lead her to ask “What’s Going On” (Marvin Gaye, 1971)? Do you have cash transactions going on off the books?
Carefully calculate and document the business usage of your automobile. Be careful not to take 100% of auto expenses (actual or mileage deduction) as business expenses. In most cases, you must have some amount allocated to personal use of the car, and maybe some commuting miles. Come up with a tracking system to help you do this every time you “Get Outta My Dream, Get Into My Car” (Billy Ocean, 1988).
Do you have a side business? Deductions for contractors, commissions, and similar indications of independent contractor status should be supported by the Form 1099-MISC’s you issued to these folks.
Pay the IRS their money during the year. Those payroll taxes that you withhold belong to them. While you’re at it, make sure you're current on your own estimated quarterly tax payments. Even if you expect not to owe any taxes, it looks better to send the IRS something, like $100. Don’t start “Falling” (the old school version by Melba Moore, 1986) or “Fallin” (the new school style by Alicia Keys, 2001) behind on this. Being delinquent on these taxes could cause a full blown audit of all your activities.
Keep copies of checks or cash received, as well as any supporting documentation. This is especially important when depositing personal loans or gift deposits. You want to make sure you can explain cash deposits and identify those deposits that represent income and those that represent personal gifts and/loans since there may be a tendency to leave them off your books.
The key is to make sure your cash flow in and out makes sense, given your annual salary, business income, and investment activities. Red flags come when you report minimal income and you look like you’re living on “Top Of The World,” (Brandy, featuring Mase, 1998) with your big house, fancy car and a bank account balance that has never been over $1,000!
Shannon King Nash is a CPA, Attorney, Author, and Entrepreneur. She is the President of the Nash Management Group, an entertainment and business management firm that represents venture funds, entertainers, producers, foundations/non-profits, high net-worth individuals and companies. Shannon is the author of the award winning book, "For the Love of Money: The 411 to Taking Control of Your Taxes and Building Your Net Worth.” She also wrote the "Vault Guide to Tax Law Careers," and "Helping the Nonprofit Client.” Shannon received her BS in Accounting from the University of Virginia McIntire School of Commerce and her JD from the University of Virginia School of Law. Her website is www.nashgroup-usa.com and you can find her on Facebook at http://www.facebook.com/pages/Tax-Diva/309254607988 and Twitter at http://twitter.com/shannonnash.
CPA, attorney, author and entrepreneur Shannon Nash provides 9 ways to avoid an audit:
Answer:
Do you always feel like “Somebody’s Watching Me”; even the IRS (Rockwell, featuring Michael Jackson, 1984)? For the record, an IRS audit is nothing to get worried about if you have accurate records and have performed all your filings properly. That being said, truth and perception may not always be consistent.
Below are suggestions for preventive steps to lower the likelihood of you being audited.
Make sure to report any and ALL income. Any income or expense that the IRS requires a third-party to verify by filing Forms 1099, 1098, 941, W-2, etc., are computer-matched during processing. Double-check these figures before you file your tax return. It is good to keep copies of all checks received (cash receipts) to verify that your year-end statement is accurate.
Review your tax return for simple mistakes before you file it, (like checking your total salary number against the amounts listed on Box 4 of your W-2’s). Also, make sure all of your calculations, personal contact information and social security numbers are listed correctly on your return.
The home office deduction has historically been one of those areas where it seems like the IRS is saying “No, No, No, No, No” while you’re saying “Yes, Yes, Yes, Yes, Yes” (Destiny’s Child, 1997). It is one of the red flags that may cause an audit. If you deduct the costs of your home office, the key is Documentation! Be able to prove that this is truly your primary office (i.e., it’s a separate room in your house, the place where you meet clients, etc.) Also remember, indirect expenses (those that apply to the entire house) must be allocated, but you can deduct all of the direct expenses (those that apply only to the business space).
Keep personal and business bank accounts separate; otherwise you’ll be saying “How Will I Know,” (Whitney Houston, 1985) which expenses to claim as business deductions and which ones are personal? Mixing use of accounts will generate more questions and may expand a simple question to a full-fledged search.
Pay for all business expenses with a check or credit card, segregated for business. The IRS auditor is looking for a payment trail when reviewing your accounts. If the IRS auditor does not see routine expenses paid out of the account, it may lead her to ask “What’s Going On” (Marvin Gaye, 1971)? Do you have cash transactions going on off the books?
Carefully calculate and document the business usage of your automobile. Be careful not to take 100% of auto expenses (actual or mileage deduction) as business expenses. In most cases, you must have some amount allocated to personal use of the car, and maybe some commuting miles. Come up with a tracking system to help you do this every time you “Get Outta My Dream, Get Into My Car” (Billy Ocean, 1988).
Do you have a side business? Deductions for contractors, commissions, and similar indications of independent contractor status should be supported by the Form 1099-MISC’s you issued to these folks.
Pay the IRS their money during the year. Those payroll taxes that you withhold belong to them. While you’re at it, make sure you're current on your own estimated quarterly tax payments. Even if you expect not to owe any taxes, it looks better to send the IRS something, like $100. Don’t start “Falling” (the old school version by Melba Moore, 1986) or “Fallin” (the new school style by Alicia Keys, 2001) behind on this. Being delinquent on these taxes could cause a full blown audit of all your activities.
Keep copies of checks or cash received, as well as any supporting documentation. This is especially important when depositing personal loans or gift deposits. You want to make sure you can explain cash deposits and identify those deposits that represent income and those that represent personal gifts and/loans since there may be a tendency to leave them off your books.
The key is to make sure your cash flow in and out makes sense, given your annual salary, business income, and investment activities. Red flags come when you report minimal income and you look like you’re living on “Top Of The World,” (Brandy, featuring Mase, 1998) with your big house, fancy car and a bank account balance that has never been over $1,000!
Shannon King Nash is a CPA, Attorney, Author, and Entrepreneur. She is the President of the Nash Management Group, an entertainment and business management firm that represents venture funds, entertainers, producers, foundations/non-profits, high net-worth individuals and companies. Shannon is the author of the award winning book, "For the Love of Money: The 411 to Taking Control of Your Taxes and Building Your Net Worth.” She also wrote the "Vault Guide to Tax Law Careers," and "Helping the Nonprofit Client.” Shannon received her BS in Accounting from the University of Virginia McIntire School of Commerce and her JD from the University of Virginia School of Law. Her website is www.nashgroup-usa.com and you can find her on Facebook at http://www.facebook.com/pages/Tax-Diva/309254607988 and Twitter at http://twitter.com/shannonnash.
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