The risk of a tax audit can make people do funny things. Some give up $thousands of tax savings just to avoid the increased chance of one. There are even tax advisors out there giving this very advice!
Then of course there’s the other extreme side, with people taking deductions they’re not even sure are legal and crossing their fingers that they don’t get noticed by the IRS.
Your Audit Risk
Some of your risk can be controlled by way of your tax planning and tax return prep. Other factors can’t be controlled, such as the more money you make, the more likely you are to be audited – no matter what, these are just statistics.
Then there’s a risk where if you do get audited there could be some adjustments, creating increased taxes for you, plus any interest and penalties. This is why organized tax planning and accurate tax return preparation are so important.
Besides these things, here are two more that can help you control your audit risk:
Follow federal and state tax laws
While the federal tax code may have about 74,608 pages, on top of your particular state’s tax code… over 95% of it is written for reducing your taxes. So simply by following the rules, even if you do get audited you’ll be prepared.
The issue with this is that there is SO much to know and keep track of, especially considering the laws that change every year. As a person with a full time job or a business of your own, taking the time to comb through all of the possible deductions and laws is next to impossible.
Keep your documentation updated and accurate
The better and more organized you are with this, the more deductions you’ll remember to take, and the more prepared you’ll be for an audit. This is usually the step people loathe, but keeping up with it throughout the year and being prepared (rather than scrounging up the last scraps of crinkled and faded receipts will allow you to avoid a major headache at the end of your business’s fiscal year!