Three Ways to Reduce the Risk of a Tax Audit

Many people fear a tax audit. So much so that they choose to give up legal tax savings in the hope of avoiding the possibility of an audit, and many times at the advice of their own tax advisor. However, when done right, identifying legal tax saving opportunities actually helps reduce your audit risk.

What Are the Risks?

When it comes to audit risk, there are two factors to consider. First, there’s the risk of being audited. While there are elements that cannot be controlled, there are elements of this risk that can be controlled through proper tax planning and tax return preparation. Second, if you are audited, there’s the risk that adjustments will be made resulting in increased taxes, plus penalties and interest. Working with a good tax advisor will help provide some control over this factor.

Follow the Tax Rules

Much of the tax law is intended to reduce your taxes, not increase it. If you follow the rules, you’ll enjoy legal tax deductions and be well-prepared for an audit. The challenge most people have with this is they don’t know the rules and have no interest in reading the tax law to learn them. This is why you need a great tax advisor on your team. Leverage your tax advisor’s knowledge to open a whole new world to what is legally deductible. Understanding exactly what you need to do to legally claim your deductions means that even if you are audited, you have followed the rules and minimized the likelihood of having any audit adjustments. For example, if you have a home office, your advisor should walk you through the home office rules. By making sure the rules are followed, they’re not only making sure you qualify for the deduction, but that you know how to document the deduction.

Keep Proper Documentation

The better your documentation, the greater your tax savings and the more prepared you are for an audit. While documentation can be tedious, it’s much easier to do a little work now and have your documentation in place rather than scrambling to get things in order while an auditor is waiting for it. When you can quickly provide an auditor with the documentation they request, the audit usually wraps up quickly.

Find a Good Team

In the case that you are audited, never handle an audit on your own. Instead, make sure you have an experienced tax preparer who has been successful at handling audits and will handle the auditor directly. This professional will control what information is provided to the auditor as well as the pace of the audit. Another team member to have is a strong bookkeeper who will help you keep all your records and documentation in order so you can be well-prepared for the audit with accurate information.

When working with your team to create and implement a tax strategy, the result is legally reducing their taxes, but the process includes several steps that reduce your audit risk at the same time.

Tom Wheelwright is a CPA, CEO of WealthAbility®, best-selling author of Tax-Free Wealth (Rich Dad Advisors Series), speaker, entrepreneur and host of two popular podcasts: “The WealthAbility® Show with Tom Wheelwright CPA” and “The WealthAbility® for CPAs Show.”