Nobody likes to get audited, but audits are a fact of life. Lower your odds of an audit with these tips.
If you’re like many dentists, you’ve been putting off doing your 2015 taxes for a number of reasons. Yes, it’s a slog, and yes, it requires some time, organization, and concentration, even if an individual or firm prepares your tax returns for you. But doing your taxes right is important, and you are ultimately responsible for paying the right amount—tax preparer or not.
The Internal Revenue Service (IRS) generally has a terrible reputation. It is often exaggerated and unfair. If you think about the sheer volume the agency deals with, and the complexity of tax laws and tax returns, you’ll find an agency that is extraordinarily efficient. Further, the Agency is often accused of working in deep shadow, with mysterious and nefarious methods for checking that you paid your full tax bill. Also untrue. In fact, the IRS is completely transparent. They even list the methodology they use to select returns for auditing. You probably won’t read that list, so here are some red flags the Agency typically watches for.
Changes in income. Unlike many types of workers, dentists can see significant swings in their income levels from year to year. This can’t be helped, but it is an IRS red flag, because it can be an indicator of someone under-reporting earnings. Just keep in mind that even if you have significant changes in income, the IRS generally audits less than 2% of returns filed each year.
Lower the flag: Accurately report your income, no matter how much it fluctuates.
Being self-employed. Now you’re thinking that you’re a huge audit risk, right? Wrong. You still aren’t, even if you own your own practice. But it can be a red flag, especially if you claim your home office or related costs as business expenses? Why? Because some nefarious operators use the category to significantly deflate their taxable income levels.
Lower the flag: Keep accurate records of your business expenses and only report those amounts that are legally tax-deductible. All of the common tax software programs include details on what types of expenses are deductible. Any accountant worth their salt will know as well.
Inflating charitable deductions. Dentists are often generous givers, both with their time and from their pockets. But while legitimate donations are, indeed, tax-deductible in most cases, artificially increasing the amounts you donated to charity could trigger an audit. Plus…karma!
Lower the flag: Ask for and keep all receipts and donation records so that you can, if asked, explain the deductions you claimed.
Not reporting all of your income. We saved the best for last. This is the most frequent biggest trigger for an IRS audit. Why? Often, it’s by mistake. A misplaced 1099 form, a brain fart on some side income, failing to recognize some investment gains, or an intentional omission of legitimate income from a second job are all pretty common mistakes.
Lower the flag: Keep all your tax records in the same place each year, and promptly place income mailed income statements in that file. If you’re self-filing, make sure you go through all the sections on income, even if you think they might not apply. And don’t forget about investment income, particularly if you’ve taken a retirement account withdrawal, sold some investments, or otherwise realized a significant gain.
Tax time doesn’t have to be painful, and the IRS isn’t looking for an excuse to audit. File honestly and thoroughly, and your Uncle Sam won’t come calling.