Nobody wants to get audited by the Internal Revenue Service (IRS). It’s just too much hassle. You have to go over your records and documents in order to deal with the IRS. In other cases, you might actually have to hire a tax lawyer. So to prevent tax hassles, here are taxable incomes you should report to the IRS to avoid an audit.

Salaries & Wages

These are the most basic individual taxable income. Uncle Sam always gets part of one’s salary or wage in a bid to fuel the government’s infrastructure projects as well as social services. So it doesn’t matter if you had your wage or salary antedated, as long as it is your salary within the year, it will be charged in the year it was earned. In the same manner, if you ask your boss to issue the check under a kin’s name, you still have to report that earning to the IRS under your tax return. Bonuses are included in this too. These are considered part of your wage or salary.

Investment Income

Whatever you earn from investments is considered taxable income. Make sure you report this in your tax return. Earnings include sale from stocks and bonds, rent from investment properties, bank account, business earnings, among others. In the case of the stock or stocks, you don’t have to pay for the entire amount. You only have to pay tax from what you actually earned from the sale—meaning you deduct the base amount of the stocks.

For earnings from rent, while you have to report them in your tax return, your tax may just be offset by some deductions you are authorized to have. The deductions are from expenses in maintaining the rental property like repairs, improvements, and depreciation.

Taxes are also imposed on savings and interests on checking accounts, as well as investments on digital currencies. Some of the other taxes are imposed on the income you earn from business ventures like your share in a corporation or partnership.

Barter Income

If it sounds archaic, know that there are still modern barter systems in this generation. There are products and services you received as payment for outgoing products and services. The tax there will be taken from the market value of the products or services you received. Say you are an interior designer. You task an a dentist to do a veneer replacement for you. In return, you have to do design work in his house. Whatever the value of that dental work will be considered as taxable income on your part.

Fringe Benefits

These are extra non-cash compensation on your part. One such example is having a company-issued car. The market value of this car will be considered taxable income. Another example is the free meal that some people enjoy from their company. The same process is followed—the market value of the meal or meals that you enjoy will be considered taxable income. Other fringe benefits include transportation allowance, communication allowance, etc.

Among the benefits exempted from tax is the health insurance that the company provides and meals that are low in value and are infrequently given. One such example is when your boss feels like treating his employees to a pizza party because it’s his birthday. A birthday is celebrated only once a year so this pizza party cannot be considered a regular occurrence, hence, it’s not among the taxed fringe benefits.

Retirement Income

Not all people have this, of course. Those who have retired are not immune to taxes. Just because they are no longer working doesn’t mean they will no longer be taxed. Retirement plans like the Individual Retirement Account, 401(k) and 403b are all considered taxable income. Accordingly, up to 85% of Social Security benefits may also be taxed.

Alimony

Those who receive alimony should report it as well because this is considered a taxable income. However, the person who gives the alimony will enjoy some benefit because the amount can be deducted from his taxable income.

Now that you have that information, it’s time to look at the many ways you can avoid a tax audit. Here are some of them;

Report all forms of income

Six taxable incomes are mentioned above—these should be reported to the IRS or else you can just prepare to receive a notice of tax audit from the government’s tax collection agency. Report all income so you will remain on the good side of the IRS. It’s not really that bad to be audited. The IRS will not automatically take away your properties as long as you will be able to provide the appropriate information about your income and you pay the appropriate amount of tax. But it is a hassle. You don’t want that kind of stress in your life—going through documents, possibly meeting with a lawyer and in-depth discussion of your financial standing.

Check your figures

The percentage of taxpayers that are actually audited by the IRS is quite low. But it is slowly increasing over the years with the government noticing a lot of wily Americans trying to circumvent the law in order to pay less than the required tax amount or none at all. However, you have to take into consideration that among those low percentage are some people who are actually audited just because of simple mistakes in the tax return. This is why you have to thoroughly check the figures in your document. Sometimes, it’s actually safer to just pay a professional to do your tax return. This is their expertise, so they know better than you when it comes to tax matters.

Honesty is the best policy

The consequences could be worse if the IRS realizes that you were actually lying about your income. Remember that the IRS is an agency of the government. It has the resources to actually trace your financial situation. So make sure you only put down the right information in your tax return.

So, you’re about to be audited. Don’t panic! Let’s follow some suggestions on how to survive a tax audit, so you can keep your cool and not end up losing more dollars.

The truth about tax auditors

No one likes to be the bad guy, and the tax auditor is not your enemy. He or she is already tagged as the “bad” one, or an annoying person, because of that negative first impression. That, unfortunately, adds unnecessary anxiety to these people’s job. The auditor’s responsibility is to verify if the information you provided is correct. Your reactions and behavior will be closely observed. Being nice and courteous will ease negotiations and will make your audit less stressful.

What you should and shouldn’t do during a tax audit

Don’t volunteer too much information. You’re already on edge because of the audit. Try not to worsen your situation by looking guilty.  Make sure to have a positive or negative reply to the queries. Be honest about the questions that you aren’t really sure of the “right” answer. Provide documents when asked and avoid being too much of open book. The auditor might add to your obligation for items not included in your return, so just stay within the confines of the paper in front of you.

Be honest.  It will be worse if you say something that can’t be verified. The audit is there to confirm what you claimed to have been accurate. You’ll put yourself in dire straits by stating something you made up or didn’t appear on your return in the first place.

Focus on the year in question. Don’t do something stupid like presenting old or past tax returns.  Those might just come back and bite you in the rear end. Auditors can add to your bill if they see something from your past files. Don’t stray from what the IRS is requesting from you.

Organized files and other relevant information can go a long way: You’ll create a favorable atmosphere by sharing all the requested documents that look organized and clean. There may be some missing pieces, but these can be discussed with the auditor. The IRS may give you some leeway when they realize your extraordinary efforts to keep your tax obligations up-to-date.

Keep your cool and show the auditor a certain level of comfort. The more relaxed you are during the IRS audit process, the more you put the auditor at ease. Let go of those jitters, and you’ll win the auditor’s trust that you are not hiding anything. So when asked what’s one of the secrets on how to survive a tax audit is, of course, to keep your cool.

Provide original copies upon request. Your original documents should always be in your possession. The IRS might lose the only copy you have and that would be such a tragedy. Keep those original copies close to your chest.

The IRS may apply substantial compliance for your situation. Even if your documentation may have some missing parts, the IRS will have this feeling that you’re doing your best to follow the tax laws. They might allow the deductions you initially stated.

You can appeal the audit should you disagree with it. An appeal can be made to the auditor if you are contesting the audit. If the person assigned to your case isn’t too accommodating, try appealing to the manager or go to higher management. You have every right to appeal any tax matters that you find questionable.

A tax professional might be able to help you: Call in the professionals to defend your case. It doesn’t hurt to have someone with experience in tax matters. He or she can guide you through an audit.

How you should handle a difficult auditor

Don’t allow the difficult auditor to push you around. Follow these suggestions to let them know you mean business.

You can request to have the audit delayed. No one likes to have his or her work delayed because that will affect the performance evaluation reports. Auditors don’t want delays, too. However, if you tell the difficult auditor that you might seek a delay in the proceedings, he or she might ease up on you a bit.

You may ask for a recess and return at a later time. If the difficult auditor insists that you can’t, you may tell him or her that you are hiring a tax professional. The auditor should allow you seek the help of a tax professional.

You can ask for a new auditor to review your case. The difficult auditor could trigger you to feel that things might be heating up too much and heading in an unfavorable direction. If you feel that there’s this unfairness or disrespect, you may speak with the manager that you feel you are not being treated professionally. 

You may request for a new auditor to handle your situation.  However, the request will most likely be rejected. But letting the difficult auditor know that you go straight to the manager may just warn him or her.

Let the auditor know that you can stand up for yourself.  Don’t just sit down and allow the auditor to criticize or belittle you. Ask pertinent questions so the auditor remains alert that he or she should be able to explain important information. Try not to be a bully yourself by keeping things civil and polite. But because of your tenacious nature, in the auditor’s mind, he or she may get that feeling that you’re not that much of a pushover.

You can record the audit: Ten days before the audit, submit a written request to the IRS that you will record the proceedings. When the auditor becomes aware that every move will be recorded, maybe he or she won’t become too strict or difficult.

The important thing about audits is that you are providing information that is as accurate as possible.  Make sure that whatever data you submitted was done in good faith. You might also run into some trouble with an auditor who might discredit any deductions claimed on your return.

How to survive a tax audit? Remember: there are no hard and fast rules in getting through an IRS audit. In any case, may these simple suggestions help you survive a tax audit because you have your game face on!

There are certain “red flags” that the IRS searches for in order to deem an audit necessary. And when these red flags are prominent, the IRS can conduct a tax audit. 

Let’s delve into some of these reasons on how to avoid an IRS tax audit

Always state true facts:

Please be as accurate as possible on your tax return. There are three various computer programs the IRS runs to verify the accuracy of your data. They have the Discriminant Function System (DIF) that makes use of a classified formula where the IRS can determine which returns have a potential for certain errors and ranks them accordingly. There’s also the Unreported Income Discriminant Function System (UIDIF) that tries to search for potential unreported income. The Information Returns Processing System (IDF) crosschecks your return with third parties to verify authenticity and consistency. With these computer programs running such checks, it’s very difficult to put false information on your return. So if you’re asking for the best advice on how to avoid an IRS tax audit? The answer is: Be HONEST!

Seek help from a tax professional and/or use a tax software program for your tax requirements:

Calculations should be more accurate, the return should be more correct, and legibility should be more ensured when asking a tax professional to assist you. Tax software could be a big help as well. Math errors or incompleteness will trigger a red flag on your return. Avoid IRS tax audit by getting the professional’s expertise to file your return correctly. Yes, and that’s actually one of the best ways on how to avoid an IRS tax audit.

Filing a Schedule C should be done cautiously

 Those individuals who abuse deductions when filing a Schedule C increase their chances of being audited. Expenses can be coursed through an LLC or another entity to keep it legit. Business organizations are able to layer such expenses which make it quite a challenge for the government to double check what is being claimed. With this set-up, the likelihood of an IRS audit decreases.

Be careful when claiming home office deductions

 The justification for home office deductions is something the IRS really likes to check. As part of your due diligence, keep a separate phone number for business transactions, update your appointment book of clients when conducting meetings at your house, and use your home office address for billing statements rather than just a PO box. Try to maintain below 20% of the square footage of your business space located at your home.

File your tax return electronically

Mailing your tax return the last minute and not through certified mail might not get that confirmation from the IRS that it was received. Be more efficient by filing electronically and the confirmation notice from the IRS that it was accepted and received should be forthcoming quite immediately.

Have your financial records well organized and detailed

Not having receipts around to verify expenses might not avail you of accepted deductions. You could guess but the IRS computer programs might call you out on your wrong estimate. All income and expenses should be documented properly to back up what you have reported on your tax return.

File a joint return for you and your spouse

If you indicate married as your status, the IRS expects a joint return. Filing separately for couples is acceptable, but more problems may arise since this was not declared on a joint tax return.

Avoid using rounded numbers

When you round off numbers on your return, that sends a red flag to the IRS because you are not reporting an accurate amount. So, try not to do that.

Affix your signature on your return and file it

Not but not least on how to avoid an IRS tax audit is to secure your signature on your tax return. Make sure to file your return, too. So, be precise and careful with your tax return .

These tips on how to avoid an IRS tax audit should not be taken lightly. Otherwise, you should prepare yourself for being the next on queue for the IRS audit.

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 The IRS tax audit process is not something to be feared about if you’re honest. The IRS and State departments of taxation conduct audit to verify the accuracy of your tax returns. In some cases, they want to check the integrity of your return, and upon their review, you might be due for a refund.

How are tax returns selected for an audit?

There are computer programs that the IRS use to check the accuracy of your return. There are also methods not dependent on these computers. Let’s take a look at their methods for the IRS tax audit process:

The Discriminant Function System (DIF)

 Deductions and exemptions claimed may put a red flag on your tax return with this specialized computer program. You’ll be given a DIF score for the tax return you submit. Through a classified formula, the score is determined. This is one score you want to get a low mark because the higher it goes, the more likely you are to be audited.

The Unreported Income Discriminant Function (UIDIF)

 The main difference of this from the DIF system is it’s heavily focused on unreported income. The score is calculated on the individual’s income and expense ratio. Spending beyond your reported income will send a red flag to the IRS. But, if this can be verified through the filing of low-income years, then such an explanation would suffice.

The Information Returns Processing System (IRP)

Third parties (such as employers, banks, social security administration, etc.) who submit such tax information can be cross-checked to verify the accuracy of your tax return. In other words, if your employer says one thing and you file another number, then you are setting yourself up to be audited. Don’t assume you can get around this third-party verification system.

If incriminating documents are turned over to the IRS

Should the IRS come into the possession of evidence that shows intent for tax evasion, an audit becomes inevitable. The IRS just needs to check if the correct taxes were paid and identify those involved in tax avoidance scheme.

Audits of Related Entities

When the IRS conducts an audit for one entity, and it’s not syncing as it should with other returns of other entities, then that trail needs to be followed to explain the discrepancies.

Should you receive a letter notifying you that the IRS will conduct an audit, there are three examination methods  (as part of the IRS tax audit process) that they’ll probably follow:

1. Correspondence Audit: This most common type of audit is where the IRS will request for certain documents that can be sent to them through mail.
2. Field Audit: If your earnings are over one hundred thousand dollars, then the IRS will make a visit to your home, or place of business, or tax professional’s office to do the audit. It’s not that common for the IRS to conduct this.
3. Office Audit: With this type of audit, you will be required to bring the requested documents and you will be meeting with a representative of the IRS to review your return thoroughly.

Once they’ve completed the IRS tax audit process, the IRS Form 4549 or the IRS examination report will present proposed changes to the tax liability. You can either agree or disagree with these findings.

Approval of Audit Findings

The copy of this report must be submitted with IRS Form 870, which is a Consent to Proposed Tax Adjustment. Putting your signature on this form means you agree with the tax deficiency, if any, and are willing to settle any penalties or interest accrued. A payment plan will be agreed upon should you be unable to pay the full amount and a monthly payment scheme will be determined.

Disapproval of Audit Findings

 You will have 30 days to submit additional documents for their consideration. This will give you an opportunity to further discuss your case with the examiner which may even lead to meeting with the group or senior manager. An appeal can be requested since you are in disagreement with the findings. Should you fail to do anything within 30 days, the IRS will deem this as a disagreement. Otherwise, if you don’t file for an appeal within, IRS will finalize will become final.