Five tips to avoid penalties and interest

The Internal Revenue Service recently released its 2018 Databook, revealing a decrease in individual tax return audits for the seventh consecutive year. According to the Databook, “the IRS audited just 0.59% of individual tax returns last year,” the lowest level since 2002.

While there is no surefire way to avoid an audit. However, there are ways to avoid added penalties and interest if your return is audited:

  1. Report all income. Institutions and employers report the income that they distribute to the IRS. If the amount reported by the institution does not match that reported on your tax return, it can result in a “matching notice”.
  2. Maintain a vehicle log. Keep a record of each business trip, including date, starting location, ending location, mileage, and business purpose. It is also valuable to record tolls and other expenses.
  3. Keep charitable contribution receipts. This is very important particularly if you donate substantial amounts to charity. If you donate cash, request a receipt. If you donate non-cash items, record those items and their value. You may also want to take a photo of the items you donate.
  4. Verify Home office. To claim a home office deduction, “you must regularly use part of your home exclusively for conducting business” and it must also be the principle place of your business. Speak to your tax professional to determine whether the simplified or actual method is best for your situation.
  5.  E-file your tax returns. The IRS suggests that e-filing can reduce errors on a tax return. “The error rate for a paper return, the IRS reported, is 21 percent. The rate for returns filed electronically is 0.5 percent.” Another advantage of e-filing is that the IRS generally processes your refund quicker than paper filing.

As with all decisions regarding tax compliance, be sure to have a discussion with your tax professional.