The best way to avoid an audit: Preparation
Getting audited by the IRS is no fun. Some taxpayers are selected for random audits every year, but the chances of that happening to you are very small. You are much more likely to fall under the IRS’s gaze if you make one of several common mistakes.
That means your best chance of avoiding an audit is by doing things right before you file your return this year. Here are some suggestions:
Don’t leave anything out. Missing or incomplete information on your return will trigger an audit letter automatically, since the IRS gets copies of the same tax forms (such as W-2s and 1099s) that you do.
Double-check your numbers. Bad math will get you audited. People often make calculation errors when they do their returns, especially if they do them without assistance. In 2016, the IRS sent out more than 1.6 million examination letters correcting math errors. The most frequent errors occurred in people’s calculation of their amount of tax due, as well as the number of exemptions and deductions they claimed.
Don’t stand out. The IRS takes a closer look at business expenses, charitable donations and high-value itemized deductions. IRS computers reference statistical data on which amounts of these items are typical for various professions and income levels. If what you are claiming is significantly different from what is typical, it may be flagged for review.
Have your documentation in order. Keep your records in order by being meticulous about your recordkeeping. Items that will support the tax breaks you take include: cancelled checks, receipts, credit card and investment statements, logs for mileage and business meals, and proof of charitable donations. With proper documentation, a correspondence letter from the IRS inquiring about a particular deduction can be quickly resolved before it turns into a full-blown audit.
Remember, the average person has a less than 1 percent chance of being audited. If you prepare now, you can narrow your audit chances even further and rest easy after you’ve filed.
Does your business need cyber insurance?
It’s a nightmare scenario few small businesses consider: hackers breach your computer system, steal your customer lists and threaten to exploit sensitive data. Data breaches by malicious individuals don’t just pose a financial risk. They threaten your reputation and can trigger litigation if your customers blame you for the exposure of their data.
So far, many of the victims of these high-profile attacks are large corporations. A poster child for this is the massive 2017 cyber breach of the credit reporting agency Equifax, which affected more than 143 million Americans. Equifax’s financial loss was estimated at $125 million, equal to more than a quarter of their net income during 2016. Equifax also reportedly faces more than 50 class action lawsuits, which also may be covered by the company’s insurers.
Here are some things to consider regarding the management of your cyber risk with potential insurance coverage:
- Do you have coverage? Your insurance policy may already cover some of the risks of cyber attacks. A good place to start is to review your policy and understand what is covered, if anything. Also spend time evaluating your potential risk to determine how it correlates to your insurance coverage.
- Comprehensive or partial? Depending upon how you assess your risk, you may consider either comprehensive cyber insurance or partial coverage in the form of a rider or endorsement on an existing policy. Talk to your current insurance firm to determine your alternatives. Because cyber insurance is still a new service, your provider’s options may be limited. The cyber insurance market is currently dominated by four major insurers that offer comprehensive insurance, according to Business Insurance magazine: American International Group, Beazley, Chubb and Zurich Insurance Group. Partial coverage may include riders covering errors and omissions, and the cost of business interruption caused by cyber attacks.
- Unique elements of a cyber insurance policy. Most comprehensive cyber insurance policies cover breach-response and forensic costs. This covers the cost of finding the cause of a data breach, fixing it and limiting the damage. Comprehensive policies should provide liability coverage in case you are sued by customers as a result of their data being exposed during the attack.
- Know the exclusions. Some cyber insurance policies do not cover breaches caused by infrastructure failure, or attacks by state-sanctioned hackers, according to ThinkAdvisor. There have been many high-profile cyber attacks allegedly attributed to hackers affiliated with the Russian and Chinese governments in recent years, so know how your policy covers this situation.