Filing taxes can feel like navigating a potential minefield, especially when it comes to avoiding an IRS audit. There are three key ways taxpayers unintentionally “poke the bear,” increasing their chances of being audited. By being mindful of these triggers, you can minimize your risk and breeze through tax season stress-free.
- The Intricacies of Electronic Filing: The IRS favors electronic filing due to the immediate access it provides to the financial data within tax returns. This data is scrutinized first by Artificial Intelligence (AI) and then by human experts. The goal is to keep your return from raising any red flags, which means avoiding behaviors that might attract AI’s attention.
- The Art of Not Poking the Bear: One of the surefire ways to avoid unnecessary IRS attention is to refrain from “poking the bear.” Here’s how:
Avoid Using Generic Categories: Words like “OTHER,” “MISCELLANEOUS,” or “UNCATEGORIZED” are like beacons for the IRS. These vague categories signal a lack of specificity in your expenses, which can be a trigger for suspicion. Instead, allocate expenses to appropriate categories or create new ones if needed. If you can’t identify what an expense is for, consider excluding it altogether.
- Mind Your Expense Categories: Be cautious when your expense categories exhibit certain patterns:
Beware High Percentages: Categories with a high percentage of your revenue, especially 5% or more, can raise eyebrows. The IRS often targets these categories in correspondence audits, particularly if the percentage seems unusually high. To avoid this, consider splitting such categories into smaller, more specific ones. For instance, if “Advertising” constitutes 15% of your revenue, consider breaking it down into Digital Ads, Print Ads, Trade Shows, etc.
Industry Norms vs. Red Flags: While some industries naturally have high expected percentages for certain expense categories (like fuel for long haul truckers), it’s the unexpectedly high percentages that often trigger audits. Aim to stay within industry norms, and if you’re deviating significantly, ensure you have proper documentation to support your choices.
By understanding the nuances of tax filing and embracing these strategies, you can significantly reduce the chances of drawing unwanted attention from the IRS. The goal is to file accurately, transparently, and within industry norms. Remember, the key to a peaceful tax season is avoiding the proverbial “poke” that might awaken the IRS bear.
Kelly Coughlin, CPA
CEO, EveryDayCPA.com
Founder,TaxRxCenter.org