IRS Tax Audit Defense Solutions

Shielding Your Finances: IRS Tax Audit Defense Solutions

IRS Tax Audit Defense Solutions

The feared letter from the IRS that everyone dreads. You tear it open to discover some of the most alarming news: “You have been selected for a tax audit for years…”

But there are methods to safeguard yourself against an IRS Tax Audit. As people who have been IRS Agents, Managers, and Instructors, we’ve uncovered strategies that enable the typical taxpayer to prevent an IRS tax audit.

How to Protect Yourself From An IRS Audit

1. Ensure that a trustworthy tax return preparer handles your tax return. If your preparer guarantees substantial refunds without requiring the correct documents for deductions and credits, you can anticipate an audit following the return’s filing.

When your tax return preparer includes deductions that should not have been claimed, it’s you who will face the audit, and you’ll be obligated to pay the extra tax, interest, and penalties.

Should the IRS suspect that your tax return preparer is unskilled or claims substantial non-existent deductions, it’s likely that all returns prepared by that individual will be chosen for an audit.

You should seek a tax return preparer not who assures you the largest refund, but who calculates the accurate tax. It’s advised to employ a tax return preparer who is knowledgeable about tax law and who includes only the deductions on the tax return that you can properly substantiate.

Remember, the ultimate responsibility for any additional tax, interest, and penalties lies with you.

2. Submit all necessary tax returns by the established deadline. If you neglect to file your tax returns, the IRS will eventually conduct an audit on you.

Failing to file your tax returns on time will lead the IRS to impose a failure-to-file penalty, charging 5% per month, up to 25% of the tax due. If the IRS concludes that your failure to file was due to fraud, the penalty will escalate to 15% per month, reaching up to 75% of the tax.

Therefore, you are invariably better served by filing the tax return by the required deadline, even if you lack the funds to cover the tax. This way, you will avoid the penalties associated with failing to file.

3. Declare all the income reflected on the Form 1099’s that you receive. You must report all your income, even if you don’t receive a 1099. Filing your tax return without including all your income invites the risk of an audit. Should the IRS audit your tax return and discover unreported income, you will be charged tax on that omitted income, along with interest on the tax, calculated from the tax return’s due date to the date the tax is paid.

Following that, the IRS will impose either a 20% accuracy-related penalty or a 75% fraud penalty on the additional tax, plus interest on these penalties, computed from the tax return’s due date until the payment date.

4. Avoid claiming a deduction for a home office. To be eligible for a home office deduction, the space must be utilized for work, and it should be your principal place of business. Many taxpayers misuse this deduction.

Unless your home office serves as your main place of business, refrain from taking this deduction. Additionally, if you have accurately documented that 15% of your residence is used for business, the IRS will justifiably contend that 15% of the profit from the sale of the residence is taxable income. This can lead to an unexpected tax liability on your part. Unless there is a substantial reason to claim this deduction, it is best to steer clear of it.

5. Refrain from claiming a substantial Schedule C loss unless you genuinely incurred a loss. A significant Schedule C loss indicates that your business deductions surpassed the income earned from the activity.

The IRS will likely scrutinize the origin of the funds used to cover those excess deductions. You will have to provide evidence for the sources of the non-taxable income that paid for that loss. If assets were sold to finance the loss, proper documentation of those sales will be required.

Potential sources of non-taxable income might encompass loans, gifts, and inheritances. Should the IRS request this information, you must be able to document these sources.

The supporting documents could encompass copies of checks, closing papers, gift tax returns from the individuals who made the gifts, and estate tax returns for funds that were inherited.

6. Avoid claiming a loss from a business activity that the IRS might categorize as a hobby loss, unless you possess the proper documentation for that loss.

Should you deduct a loss from activities such as horse racing, dog racing, car racing, boat chartering, or any other enjoyable pursuits; the IRS will require evidence that the activity was undertaken for profit.

Therefore, it’s advisable to maintain a separate bank account for these activities and have a well-articulated business plan detailing how you anticipate generating profit from the endeavor. Valid business projections will need to be presented.

7. If you choose to deduct donations of property to a charitable organization, ensure that you have the necessary documentation, which must always include a valid appraisal. Deduct only the amounts you have genuinely donated to the charitable entities and can corroborate with copies of canceled checks.

8. If you are deducting a casualty loss, ensure that you have the correct documentation for the deduction. This documentation must consistently include an appraisal of the property both before and after the casualty event.

You should also include the amount reimbursed by insurance for the casualty, and be prepared to verify your adjusted basis in the property prior to the casualty.

In the case of a theft loss, be certain to report the theft to the police and secure a police report for the incident.

9. Always be ready for an audit by keeping all necessary documents that verify the items on your tax return in your possession, even before an audit is initiated.

You don’t want to be scrambling to find the required verification after your tax return has been selected for audit by the IRS.

10. Should you be chosen for a tax audit, reach out to Brian Dreis, a tax professional, to guarantee the most favorable outcomes.

Safeguard yourself against an IRS tax audit by entrusting Brian Dreis, a tax professional, with the preparation of your next tax return.

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