IRS Audits: Safety Guidelines For Freelancers

The vast majority of freelancers are of no interest to the IRS. As long as your books look OK and there is nothing untoward to attract their attention, they – mostly – have bigger fish to fry. However, if you make a mistake on your tax return, are doing something suspicious, or just get randomly selected, you will have to deal with the fallout – and it can be incredibly scary.

Thorough tax planning and record keeping is an absolute must, of course. But freelancers can also expect to have their entire financial records pored over with several magnifying glasses, and the IRS could ‘go deep’ into the monetary affairs of you and your family. With a little luck, you will never experience this extreme side of the nation’s tax collectors, but just in case – here’s how to deal with an IRS audit.

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Never play the percentages

When you are a freelancer, it is unlikely that you will be randomly selected by the IRS for an audit, but you should disregard the stats and play things as if an audit is guaranteed. There are several red flags that IRS inspectors look for which will increase the likelihood of getting a visit. If you have significant business expenses, for example, they might want to ask you why – and to prove them all. Any mistakes on your tax return could be highlighted, and attract a lot more interest in your affairs. The only solution is to ensure you are honest and truthful in your tax reports – in which case, an audit shouldn’t scare you at all.

Preparation

If you do get notification of an audit, you will normally have 30 days to respond before things get tricky. It’s important to go through your return with a fine tooth comb and remind yourself of everything you spent money on, including getting old transaction receipts together. You can expect a lot of questions, and you will need to answer all of them. If you are worried about the audit, you can seek out help and representation from tax and business attorneys, who will help you strengthen your case, so it is watertight. And, if there are further problems, they will also give you a rigorous defense.

Replace missing records

It is important that you return every document that the IRS asks for. Records go missing all the time, so it is critical to replace them. Failure to do so is your problem, and you will only have to send them in at a later date anyway. In some cases, the IRS may decide to disregard the expense straight away, meaning you will face a penalty on top of any taxes owed. However, it’s also important to bring the documents you are asked to bring – but nothing more. If the inspector is inquisitive about something else on your return if it isn’t in the original audit notice, you don’t have to show it. And, it is likely to be dropped straight away.

Mistakes

The IRS realizes that people make mistakes. But, because of the nature of taxes, you should never expect them to be 100% lenient. You will face a penalty for failure to keep accurate tax records at a bare minimum, and if they suspect you have been trying to hide income or make up expenses, things can get even nastier. Fines of up to 75% of your tax bill are not uncommon, and you could even face prison time.


Categories: Taxes

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February 6, 2017 IRS Audits: Safety Guidelines For Freelancers