Key #1 - Tax Preparer Selection:
Your tax return is the reporting mechanism for your tax strategy. This means that all the tax benefits identified in your tax strategy are only realized if they are reported properly on your tax return. This is why the person who prepares your tax return should be the tax advisor who created your tax strategy. Otherwise, you may get great advice with no actual tax benefits.
Key #2 - Thorough Documentation:
Maintain organized and detailed records to support the facts and positions reported on your tax return. Neat documentation not only strengthens your case but also reduces the time and cost associated with an audit, potentially saving you money in the long run.
Key #3 - Separate Returns:
By filing separate tax returns for your business and investments, it makes it more difficult for the government to audit them. If your business is a sole proprietorship for tax purposes, it does not file a separate tax return. Instead, it files on Schedule C of your personal tax return. A tax return with a Schedule C is 5 times more likely to be audited.
By having your business in a partnership or corporation, it will file its own separate tax return. Businesses that file these types of tax returns are not audited as frequently as those that file on Schedule C. If your rental real estate is a sole proprietorship for tax purposes, that means it does not file a separate tax return. Instead, it files on Schedule E of your personal tax return.
When you have your rental real estate in a partnership or corporation, it files its own separate tax return. Rental real estate activities that file these types of tax returns are not audited as frequently as those that file on Schedule E.
Key #4 - CPA Firm Signature:
The credibility and reputation of the signing CPA firm can influence the IRS's perception and handling of your return.
Key #5 - Strategic Reporting:
Pay attention to where items are reported on your tax return to minimize audit risk. Utilize descriptive names for expenses to avoid drawing unnecessary attention from auditors.
If you do receive a letter from the IRS, contact your advisor immediately.
Repeat after me: “I will never talk to the IRS.” Your tax advisor should be your voice with the IRS — not just during audits but for all communications. Remember, your role is to provide accurate and complete information to your tax advisor; they’ll handle the rest.
Want to learn more about how you can make way more money and pay way less in tax? Book a call with the team at TFW Advisors® today!