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Perhaps the best way to avoid an IRS audit is to know the rules and prepare your tax returns correctly and completely.
Before beginning this article, I looked at what everyone else had to say on the subject.
For the most part, everyone who wrote on the subject agrees on the most common reasons tax returns are selected for examination.
- Is the return mathematically correct?
- Was all the income reported to the IRS reported?
- Are you taking certain "red flag" deductions?
- Are your tax deductions too high?
If its wrong, fix it.
If you have to pay more, pay it.
If you are entitled to a larger refund, amend it.
The best way to avoid an IRS audit is to know the rules and prepare a complete and accurate tax return.
Knowing the rules is to understand tax law and the methods the IRS applies to select the returns to examine.
Knowing tax law is not something to be taken lightly.
Tax law frequently changes.
Keeping up on tax law changes is a full-time job - not one that you can just read in a couple of hours every year when it comes time to preparing your tax return.
Hiring an experienced, knowledgeable tax professional is probably your best way to do this and will certainly save you a lot of time.
Recognizing the financial relationships of income and deductions can help you recognize potentially suspect items.
Don't try to claim the most obviously incorrect deductions.
If you're showing $10,000 in income, how can you report $10,000 or more in deductions.
This is not to say this is not possible.
It's simply to say it doesn't pass the "smell" test.
I can't begin to tell you how many taxpayers have reported over $30,000 in automobile expenses and wondered why their return was selected for examination.
Did they really think that would go unnoticed? There are many non-financial relationships as well.
Are both a divorced husband and wife claiming the same kids as deductions? Are you overstating your exemptions? Are you claiming a child care credit but your spouse doesn't work? Sometimes the IRS targets particular industries or locations.
Wouldn't you find it unusual that a taxpayer owning a home and living in Beverly Hills has no income? Would you expect that a taxpayer living in an area recently hit by natural disaster could receive quite a bit of leeway in reporting casualty losses? Perhaps, the IRS targeted your occupation or industry for certain types of unreported income.
Are you working in an all cash business? Are you self-employed? Have you claimed a home office deduction? Are you a high-income taxpayer (one where an examination could possibly result in a much greater return for the IRS examiner)? These are just a few of the many considerations in avoiding an IRS audit.
The best defenses are accuracy (mathematical correctness, reporting all items as reported by others to the IRS with the same amounts) and completeness (reporting all items of income that may have been reported by others to the IRS).
Hiring an experienced tax professional and carefully analyzing income and deductions and corresponding relationships will help you to avoid scrutiny.
Prepare a comparative analysis of your returns from one year to another.
Understand your required documentation requirements and maintain these records for several years thereafter in a safe and secure place.
If your return is selected for audit, hire a certified public accountant, enrolled preparer or tax attorney to represent you.
Do not attempt to do it yourself to save a few bucks! You'll need qualified, professional help.
Your tax preparer may not be the best person to meet this challenge.
Inquire as to experience and professional credentials.
Know your taxpayer rights and work with your advisor to help gather the necessary information.
Don't panic! Go into the audit well prepared.
The IRS examiner will appreciate it and may even cut you some slack.
Don't ask for anything you're not entitled to and anticipate a proposed adjustment for anything you can't support.
If you disagree, just don't give up.
You have certain rights to appeal it.
And finally remember, "it ain't over until the fat lady sings"! Good luck!
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