Monday, July 16, 2012

Audit Risk: Reduce Yours by Hiring a CPA


Filing taxes is stressful enough. Unfortunately, many choose to hastily, and sometimes inaccurately, file their taxes and end up paying for it later down the road when an audit letter arrives from the Internal Revenue Services. This doesn’t’ have to be the case, though. If tax payers take their time, understand their tax obligations and the laws surrounding deductions, there is a good chance they will never be audited.

Of course, hiring a CPA who has passed the CPA Exam can help lower the risk of an audit, as they are aware of the various tax laws that may or may not apply to you. This greatly reduces the chances of the tax return being audited, but doesn’t guarantee it. There are a few other tactics one can use to help reduce the risk of being audited.

It’s random
Many tax returns will be pulled for an audit simply at random. For some inexplicable reason, that tax return has triggered an alert in the IRS’s system and is considered likely to yield additional tax if audited. No one is entirely sure what specifically causes one tax return to be flagged over another, so always send your return as accurately and completely as possible.

Drastic income changes
One known factor that increases one’s likelihood of being audited is a big change in income. This indicates to the IRS that there is a great potential someone is trying to hide funds or has been hiding funds, thus triggering an audit. If a taxpayer is expecting a drastic change in income, a CPA can help manage the tax return and mitigate the risk of an audit.

Making too much money
It’s true, the more money one makes, the more likely they are to get audited. In the eyes of the IRS, there is a greater probability that wealthy taxpayers will try to hide income or claim extra deductions. As such, the wealthier the taxpayer, the greater the chance of an audit. Most wealthy taxpayers, however, have already hired a CPA, which will ensure that their deductions are legitimate and unlikely to be questioned by the IRS. Researching how to hire the best CPA for your situation is always a best practice as well.

Red flags
There are four red flags which can trigger an audit almost automatically. If the Earned Income Credit is claimed, there is a good chance the taxpayer will be audited. Many taxpayers falsely claim this credit, either knowingly or not, and it can cause a lot grief for all parties involved. Additionally, if the taxpayer filed a schedule C (business profits and losses) or E (supplemental income), or form 2106 (employee business expenses) there is a greater chance for an audit. This doesn’t mean a taxpayer should avoid filing these forms, it simply means that they should consider having a professional, qualified CPA look them over or fill them out.

Filing taxes doesn’t have to be stressful. Ensuring a tax return follows the laws and passes the IRS’s audit tests is one of many responsibilities of a CPA. Hiring a CPA when it’s time to file taxes is a smart way to reduce the overall audit risk of a tax return.

5 comments:

Swedish holding company said...

Where goes the border between corporat tax planning and tax fraud, or is it constantly moving as laws are changing?

Poelinggb Yuette said...

If you had the choice between taking out $40,000.00 of your inherited cash which is part of a larger IRA to pay off debts (but did not have to sell stocks to get that $ & your tax bracket is $15% but perhaps less since I am on SSD & earn less than 14,000.00 a year) or take out a 9% re-fill on a 2nd home, which is being rented for $1000.00 a month that will be sold in 3 years with a contract)- is it as simple as comparing interest rates to decide that a 9% re-fill is a better deal than a 15% deal? ( the 9% is non-negotiable as I can only get a "no doc/no asset loan" at that 2013 tax bracketsunfortunately)or are there other matters to consider.

Poelinggb Yuette said...

If you had the choice between taking out $40,000.00 of your inherited cash which is part of a larger IRA to pay off debts (but did not have to sell stocks to get that $ & your tax bracket is $15% but perhaps less since I am on SSD & earn less than 14,000.00 a year) or take out a 9% re-fill on a 2nd home, which is being rented for $1000.00 a month that will be sold in 3 years with a contract)- is it as simple as comparing interest rates to decide that a 9% re-fill is a better deal than a 15% deal? ( the 9% is non-negotiable as I can only get a "no doc/no asset loan" at that 2013 tax bracketsunfortunately)or are there other matters to consider.

Sean Valjean said...

Thank you so much Gina. I will have to look into getting a CPA because I am sure it will help out a ton on my Manhattan tax returns.

Brooke said...

Hiring a CPA is the best choice for all the reasons mentioned. It's best to let the professionals handle it because taxes can be difficult to manage by yourself sometimes.