The Internal Revenue Service (IRS) audited 1.11% of all tax returns filed in the last government fiscal year. However, business returns with gross receipts of $25,000 or more were audited twice as frequently as the overall rate.
An IRS audit requires a time-consuming and frustrating process of collecting detailed business records. There’s no perfect method for avoiding an audit, but you can execute measures to limit the possibility.
One important way is to exercise care in choosing your tax-return preparer. The IRS has new tax-return preparer regulations. This permits easy identification of preparers who frequently compile returns that fail IRS audits. That increases the audit potential for every return of such preparers.
Carefully gather complete tax information. The IRS compares figures on your tax return to W-2s, 1099s and other reporting by payers of income to you. Make sure your tax return matches these information reports.
Don’t estimate any figures. Don’t use rounded-off amounts. Take the deductions you are entitled to report, but be prepared to justify them with accurate records. The IRS uses a discriminant function system score to select returns for audit. This compares amounts you claim for specific deductions to the statistical averages for your income level. Any large deduction relative to your income might require response to an IRS audit with proof of the amount.
Last, make sure your state income tax return is accurate. If you’re audited by a state and owe additional tax, an IRS audit is likely to follow. The IRS maintains information-sharing agreements with every state.