There is no foolproof way to avoid being audited even as a digital nomad. The IRS makes most of its selections either based on the fact that the filer is part of a targeted group or because a computer program picked out the tax return for some reason. You might do everything right and still can’t avoid an IRS audit.
However, even though many of the returns are chosen by random means, there are certain red flags that make a return more likely to be audited.
If you don’t want the IRS knocking on your door, follow these suggestions to help you avoid an IRS audit.
Avoid an IRS Audit
1. Simple math errors or typos
If you make an addition or subtraction error, you’re going to hear about it. This usually doesn’t result in a full-blown audit, but check your math before filing your return.
It can save you the stress of receiving the dreaded IRS notice in the mail. And yes. They ALWAYS come in the snail mail.
If you do get a letter from the IRS about your perceived mistake, double-check your numbers. Sometimes the math was simply wrong. It happens to the best of us.
Own up to the mistake, pay any extra tax, if due, and it will all work out fine.
2. Mismatched numbers
Unlike the above where you added something incorrectly. This might simply be mistyping a number as you enter it on the tax return.
For example, if the numbers on your W-2 form don’t match the entries on your return, the IRS will notify you.
Again, double-check and be sure that the error was yours, not theirs. Sometimes an IRS employee will enter a social security number as income!
After all, the IRS are people too and we all make mistakes.
3. You get most of your income in cash.
Remember me talking about keeping good records?
This is where it comes into play big time! If your clients or customers pay in cash, keep a good record of it. This includes the invoice and any deposit receipt.
The IRS looks for unreported income, and any cash deposits made to your accounts will be scrutinized. If those deposits aren’t being reported as income, you’d better be able to explain it.
In this case, self-employed and small business owners are particularly targeted. I know that many digital nomads make it work by running their own businesses so be careful here.
My suggestion is to use a payment processor like Stripe, PayPal, Square, Quickbooks, etc. so there is a clear trace of the deposits and income received. With many digital nomads being digital, this is pretty easy to do vs. taking cash as payment.
4. You talk too much.
If you’re ever foolish enough to try to pull a fast one on the IRS, keep your mouth closed. You’d be surprised how many neighbors, friends, and even family members report what they’ve heard.
Did you know that the IRS gives 15-30% of the additional tax collected to the whistleblower!?!?
There’s even a form, Form 211, to report those not paying their taxes properly. A large number of serious crimes are solved because the perpetrator told someone what they did.
5. You’re out of the ordinary.
When your deductions are considerably greater than others at your income level or for your industry, the computer can flag you.
Keep in mind that the IRS doesn’t have unlimited time and resources. They target the returns likely to result in the biggest collections. While I don’t like to see taxpayers pay more tax than they have to, I also say don’t go too far and cross the line in your deductions.
This can even include things like charitable donations. If you claim you’re giving 50% of your income to charity, that is a red flag to the IRS. This means they might be digging in a little deeper at everything on your return.
That doesn’t mean you can’t give 50% of your income away – it simply means that everything else can be scrutinized.
6. Your tax preparer is questionable.
Not all tax preparers are created equal. Some simply aren’t very good. Others are intentionally breaking the law. They may promise a large refund and then claim false deductions on your return.
While you’re not entirely at fault, the IRS will be coming after you, too.
Want to avoid a questionable tax preparer? Ask them for their credentials or license.
While tax preparers are NOT required to have a license, the threat of losing your way to make a living (losing a license) can help keep many of them honest. You can also ask for experience in years or industries. You can specifically look for enrolled agents, CPAs, or tax attorneys.
If a tax professional tells you things that seem too good to be true, question it. Don’t just blindly follow along. Ask them to review the numbers with you and how they come up with them.
7. Don’t use even numbers.
What do I mean by this? If you’re self-employed and file a Schedule C or other business schedule or tax return, use real numbers that aren’t even.
For example, don’t make all your deductions look like $1,000 or $500 or $4,000. This is a red flag that you didn’t actually track numbers and you’re estimating.
This includes mileage!
Keep good records and report REAL numbers that are believable. For example, $5,023 is better than $5,000.
See the difference?
Being audited is never a positive experience. On the other hand, if you act in good faith, it’s unlikely that anything bad will happen beyond an increase in your tax bill.
And, no. You won’t go to jail unless you are committing tax fraud. Simple errors are not a crime which is the only way you’ll go to jail.
The tax code is complicated – everyone knows that, even the IRS. Be honest and you have little to fear. However, keep these red flags in mind before filing your tax return so you can hopefully avoid an IRS audit!