“Audit” is the word that no taxpayer wants to hear from the Internal Revenue Service.
Some 24 percent of taxpayers are worried about being audited by the IRS, according to a poll by survey data firm Morning Consult.
Thankfully, there are several things people can do to reduce the chances of being audited, said CPA Emily Shacklett, a senior wealth advisor at Dallas-based financial management firm Hightower Signature Wealth.
Shacklett, who has more than 20 years of experience in taxes and wealth management, including at one of the leading accounting firms in the world, KPMG, shared her advice with The Independent. The interview below has been condensed and lightly edited for clarity.
Verify your identity
The first thing I recommend is signing up for a free ID.me account. It’s an identity verification platform you typically need to enroll in to get access to your online IRS account. The sign-up process is complicated and has a lot of hoops to jump through, but it’s really beneficial for taxpayers because it provides access to so much important information.
Through their IRS account, taxpayers can see the prior year’s tax returns and, just as important, track the income forms that companies they worked for sent to the IRS. That’s really important, because I see a lot of “matching” errors trigger audits, which is what happens when the IRS notices that there are fewer income forms filed on a return than it received.
Instead of taxpayers trying to remember all the companies that paid them in a given year – which can be overwhelming for freelancers – they can go into their IRS account, look at which 1099 and W-2 income was reported, then compare that to what’s on their tax return.
This is a great way to lower the chances of a matching error, especially since more and more income-related electronic tax forms are sent by email and can be easy to miss. It’s a second layer of protection.
Be accurate
People with Schedule C, a tax form commonly used by people with business income, tend to get audited more frequently because that’s an area the IRS has historically seen as somewhat subjective.
Unlike official IRS forms that state income from an employer, the IRS can’t track how many miles someone drove for business or how much square footage in a home is used for a home office, which are two ways to earn deductions on a Schedule C.
Some taxpayers might see “subjectivity” as a chance to overstate for example how much they spent on car expenses related to a business or how much of their home they use exclusively for work.
To avoid an audit here, be truthful on the Schedule C. If a taxpayer happens to overestimate their expenses or leave out income, it could trigger an audit, and the IRS will likely ask for documentation to prove the questionable numbers.
Be clear on crypto
Every tax season, the IRS focuses on certain areas of tax returns. This year, one of the areas is digital currency and crypto transactions. These transactions can be complex, which means it is easy to make mistakes when entering information on a tax return.
I recommend that taxpayers who’ve made digital currency or crypto transactions keep meticulous records and work with a professional who can help them file those transactions correctly.
IRS audits often come with a request for documentation, so if the supporting paperwork isn’t organized and ready, it could be a stressful and drawn-out process.