Another big reason many people dread the tax return process is the fear of an audit.
I’ve seen people give up thousands in LEGAL tax savings in an effort to hopefully reduce their audit risk, and many times at the advice of their own tax preparer!
I regularly have new clients tell me their prior tax preparer told them not to take a particular deduction because the deduction wasn’t worth the audit risk.
I’m always shocked when I hear a tax preparer recommends not taking a legal tax deduction because of the risk of audit. Why? Because when done right, identifying legal tax reduction opportunities can help you prepare for an audit.
How Reducing Your Taxes Can Prepare You for Audit
When I work with clients to create and implement a tax strategy, the result is legally reducing their taxes, but the process includes several steps that actually help them prepare for an audit at the same time.
Here are a few examples.
Understanding and Following the Rules
One way I identify tax savings is by looking at where my clients spend their money. By doing this, I can identify expenses they already incur and determine how to make them legally deductible.
In order to make these expenses legal tax deductions, I work with my clients to make sure they understand the rules they need to follow.
For example, if my client has a home office, we go through the home office rules. By making sure the rules are followed, I’m not only making sure my client qualifies for the deduction, but that they know how to document the deduction.
The better the documentation, the greater the tax savings. AND, the better the documentation, the more prepared they are for an audit!
Staying Up to Date on New Tax Law
Whether I’m creating, maintaining or updating a tax strategy, it’s critical to make sure the strategy accounts for changes in the tax law. Any time there are changes in the tax law, it’s an opportunity to identify more ways to legally reduce your taxes.
Staying up to date with tax law changes helps my clients make the necessary changes to their tax strategies which also helps them be better prepared for an audit.
A new tax law was passed last week to help jumpstart business hiring and spending – the Hiring Incentives to Restore Employment (HIRE) Act.
The HIRE Act provides for payroll tax forgiveness and an employer tax credit of up to $1,000 for qualified new hires. It also extends enhanced Code Sec. 179 small business expenses.
What You Can Do Right Now
I find that those who know the rules are most successful at reducing their taxes. If you position yourself to be audit ready all the time, it’s possible to reduce your taxes – legally!