Background

Year-end tax planning is a final review and adjustment of your tax position before the calendar year closes. The IRS selects returns for audit based on a mix of computerized scoring, mismatches with third-party reports, and referrals. Prudent year-end planning reduces red flags (sudden income shifts, large or poorly documented deductions) and improves your ability to substantiate items if questioned (IRS: how the IRS selects returns for audit: https://www.irs.gov/individuals/how-the-irs-selects-returns-for-audit).

How year-end planning reduces audit risk

  • Reconcile income: Match W-2s, 1099s and brokerage statements to your records. Third-party reporting mismatches are a common audit trigger. See more on common audit triggers: Common Audit Triggers and How to Reduce Your Risk.
  • Substantiate deductions: Keep receipts, mileage logs, bank records and third‑party documentation. The IRS expects contemporaneous records—see IRS guidance on recordkeeping (https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping) and our guide on record retention.
  • Time income and deductions: Shift deductible expenses into the current year or accelerate income into the next year when it reduces audit scrutiny and tax cost—consistent with tax rules and business realities.
  • Correct errors early: If you discover a mistake before filing, fix it. Amending is sometimes necessary, but late voluntary corrections handled before contact from the IRS are generally less problematic than waiting.

Practical, step-by-step year-end checklist

  1. Run an income-and-deduction reconciliation by account. Flag items that don’t match third-party forms.
  2. Review large or unusual items (charitable gifts, business losses, home office claims) and gather supporting documentation.
  3. Verify contractor payments and issue or request corrected 1099s if amounts don’t match payroll or bank records.
  4. Maximize tax‑favored retirement contributions (401(k), traditional IRA) where possible—these lower adjusted gross income and may reduce audit attention on income thresholds.
  5. Evaluate business entity reporting (S corp salary vs. distributions, depreciation vs. Section 179) with your advisor; mismatches here often draw scrutiny.
  6. Make estimated tax payments or adjust withholding to avoid underpayment penalties and large refund swings that draw questions.
  7. Create a digital audit package: organize scanned receipts, ledgers, and a one-page summary chronology of unusual transactions. See our guide to preparing a digital audit package: Preparing a Digital Audit Package.

Real-world examples and professional context

  • In my practice, a small-business client reduced audit exposure by prepaying eligible 2025 expenses in December and documenting invoices and checks clearly; this lowered their 2024 taxable income and removed the need to claim large estimated expenses without backup.
  • Another client avoided an audit issue by reconciling a broker’s cost-basis error before filing; correcting the reported gain removed a mismatch flag the IRS would have seen.

Who benefits most

Year-end planning helps individuals and businesses, but it’s most valuable for taxpayers with: high income, multiple income sources, business ownership, significant itemized deductions, or large non‑routine transactions (inheritances, asset sales).

Common mistakes to avoid

  • Claiming large or unusual deductions without contemporaneous documentation.
  • Ignoring 3rd-party reporting (1099s, broker statements) and relying only on bank records.
  • Waiting until the last day without giving yourself time to gather corrected forms or professional advice.

When to involve a pro

Start planning early—ideally by Q3 or as soon as a significant transaction occurs. Consult a CPA, enrolled agent, or tax attorney for complex situations (e.g., entity changes, large estate events, complex income recognition). If you’re already under IRS inquiry, engage a tax professional experienced in audits or appeals.

Quick FAQ

  • When should year-end planning start? Begin no later than Q4; earlier if you have complex items.
  • Can changing withholding reduce audit risk? Yes—reasonable withholding and estimated payments that match expected tax reduces large refunds or balances due that can trigger review.
  • How long should I keep records? Follow IRS recordkeeping guidance—keep records long enough to support items shown on your return (see IRS recordkeeping page above).

Helpful links

Professional disclaimer

This article is educational and does not replace individualized tax advice. For guidance based on your facts, consult a qualified tax professional or refer to IRS guidance linked above.