Independent professionals have additional tax responsibilities above and beyond those of conventional employees and are also at risk of a tax audit. With extra forms and numerous potential deductions, it can be easy to overlook small details or miscalculate. While there’s no way to completely protect yourself from the dreaded tax audit, you can reduce your odds of being singled out by eliminating poor tax practices.
Here are four best practices to follow to avoid being audited.
1. Double Check Your Math
Simple math errors are one of the most common tax audit red flags. Whether you’re filing on your own or looking over your accountant’s work, don’t hesitate to take a second and third scan through the numbers. Check the math, making sure the totals in your columns add up and that your capital gains and losses are recorded correctly. Use exact numbers rather than rounding up and rounding down, and confirm the numbers on your state returns match the numbers on your federal returns.
2. Review the Details
Another common reason the IRS may pull a filing is because people simply forget to sign their tax return. While this easily preventable oversight isn’t usually enough to trigger a tax audit, it can draw attention to your file which can expose other errors, omissions, and mistakes. Be sure to carefully review every page—print or digital—checking details such as your Social Security number, spelling of your name, or other small typos.
3. Always Be Honest
Underreporting income either drastically or consistently can put you at risk for a tax audit. You should be able to back up everything you report and claim on your tax return—especially as an independent contractor. Make a habit of tracking all of your expenses and receipts as well as the business reason behind them. Failing to report your true income in addition to extra money you may have received throughout the year, such as the sale of an asset like a house, can result in paying back-taxes, penalties, and interest, and lead to further investigation.
4. Claim Legitimate Deductions
The IRS allows the self-employed professionals to write off many crucial supplies, equipment, and costs. While this is a great benefit, these deductions are also more closely scrutinized. Deductions should be proportional to your income. Expensive meals, non-work-related travel, and home office deductions can be red flags. Many people abuse the home office deduction, so if you take this deduction, make sure you comply with the requirements. A home office must be your principal place of your business and you must use this space exclusively for conducting business. That said, if you have the documentation to back up your deductions, don’t be afraid to claim them.
Always remain prepared for a tax audit by maintaining detailed records of your business activities, expenses, and income, and keeping these records for a minimum of three years. Refer to IRS guidelines if you are unsure of anything, or speak with an accountant or bookkeeper.
The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.