How to Avoid an Audit by the IRS

If our law firm absolutely knew how to absolutely avoid an audit by the IRS, Joseph Seckelman would be quite wealthy. That information, of course, is a closely guarded secret of the IRS. There are, however, some general guidelines that you can follow to reduce your chance of being audited:

If you have a business and it is a sole proprietorship (you file IRS form Schedule "C" with your 1040 form due April 15th) you must be very conservative with your deductions. Sole proprietorships get audited more than any other type of entity. Solution, form an LLC (Limited Liability Company). LLCs are usually taxed as partnerships and do not get audited as often as sole proprietorships.
The IRS has announced they are going after and auditing S corporations. S corporations don't pay tax, the taxable income is passed down to the shareholder level and tax is paid there. What a lot of people have "discovered" is that the taxable income passed down to the shareholder level is not subject to the 15.3% Social Security taxes. Meaning that they do not pay themselves a salary, they take a 100% dividend and save 15.3% . WATCH OUT! The IRS is aware of this scheme and auditing companies like crazy.
Starting in 2007 the IRS has said it is going to reinstitute the so called "Taxpayer Compliance Audits." To describe these audits in two words: "Pure Hell." These audits go line by line and you have to prove every single line including who you are! They are used to develop the auditing software the IRS uses for determining future audits. About 1 in 1600 tax returns will suffer this kind of audit. These audits are picked at random. There is no way to avoid them.
Extremely high charitable deductions lead to an audit. A lot of charities solicit the donation of your old car, truck, motorcycle, R.V. or boat. These are legal deductions but be careful. First they can lead to an audit. Second, if you give a large item (like a car, truck, or RV) under the new rules, you can deduct only the amount the charity sells the item for. You cannot deduct the fair market value as before.
The IRS rarely audits people who have wage (W-2) income only. This is because a company has sent the IRS your W-2 earnings statement verifying your income. Only when one or more of the five itemized deductions (medical, taxes paid, home interest paid, charitable, or miscellaneous) are too big for your W-2 income does the IRS do an audit.

Disclaimer: The information in these web pages has been prepared as a service to the community and does not constitute legal advice. This information may not apply to your situation particularly if you do not live in the state of California. Do not make legal decisions based on this material. Consult an attorney in person before making any important legal decision.