November 25, 2011

Top 5 tips on "how to avoid a tax audit"

With the new tax season coming in just a couple of months, here are some tips that can help you with "how to avoid a tax audit":

Don't forget to report tax information like Form 1099 & Form K-1- Form 1099 is something that your recieve if you earned income from sources like commission etc or something that you have been contracted for & the payer sends one copy of the form 1099 to the IRS. So, the IRS has your source of income in its records already, so if you do not report it, your are going to be in trouble. Similarly you should always report your Form K-1 which you recive from the S-corporation of which you own one. Since the S-corp income is not taxed at the Federal tax level, that income is taxed on the personal tax return of the S-corp owner, so it really needs to be reported.
Follow Form 8283 for donations, if you make any- Do not think that you can put any amount in the name of cash donations. It can be a big catch.
Be very careful with your Real Estate Losses. There are very hig chances of a scrutiny if you have rental real estate and you lose money. Make sure you keep good records of how much time you spent on the activities which that can influence whether your losses are “active” or “passive.”
Don't try to be too greedy on claiming travel and entertainment. Always make sure that in spite of your income being high, high travel and entertainment expenses for business can be a very prominent step making your tax return. Watch carefully that do you genuinely meet the business purpose tests before you claim it.
Keep your yearly comparatives in a good shape- What I mean to say is that if your earnings are quite the same as your last year numbers, don't create some drastic high expenses this year which are actually not expenses. One of the major reasons for many tax audits has been that the IRS compares your numbers to previous years' returns & any drastic changes reflect something to be inquired about.