Eight Ways to Avoid (or Survive) an Audit

No taxpayer wants to be audited. There are steps you can take to decrease the chances you’ll be audited, or at least make any audit far less painful. Here’s a quick checklist to see if you’re in the clear. 1.       Cross your t’s and dot your i’s. The easiest way to avoid an audit is to ensure your return is accurate. The best way to do that – have it prepared by an experienced tax professional who knows your situation. Now this may seem like common sense, but even one inadvertent mathematical error or transposition of a Social Security Number may prompt a closer look at your return.

2.       How you generate income does matter. There are certain professions that attract more scrutiny. For example, those who are self-employed or receive large amounts of cash (such as waitstaff and taxi drivers, for instance) are generally more likely to be audited as opposed to employees who receive a W-2. Although certain expenses such as an in-home office  or employee business expenses can be red flags, you should always claim the deductions to which you’re entitled and keep good records.

3.       Alimony is not free and clear. Not reporting alimony payments received can cause big trouble. The IRS matches alimony deducted by your ex-spouse to the alimony income you report.

4.       Be accountable for automobile expenses. One of the most commonly audited items is automobile logs for self-employed persons or employed individuals using their cars for business purposes. The key to protecting yourself here is to keep detailed records of your mileage on a daily basis. Try to keep a log of the beginning and ending odometer readings, location, and reason for each business-related trip.

5.       Be able to substantiate deductions. Even though you should claim every deduction you’re entitled to by law, if the IRS questions the amount claimed on your return, it is up to you to prove that you incurred those expenses. For example, to deduct any charitable donation of money, an individual must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity. Other substantiation, including an appraisal for donated property, may be required.

6.       What’s the DIF? When you file your return with the IRS, they use a proprietary formula to calculate your Discriminate Information Function (DIF) score. Returns with the highest DIF scores are the most likely to be selected by the IRS because they pose the best chance for the IRS to collect additional taxes, interest and penalties. The best way to avoid a high DIF: make sure to report all taxable income – from interest earned on your bank accounts to interest earned on investments and claim only the deductions and credits to which you’re entitled.

7.       Report foreign-source income. If you have income from sources located outside the United States, be sure to report it. Also be sure to file Form TD F 90-22.1 if you have signature authority over foreign accounts that had a balance of more than $10,000 at any time during the year. You may also be required to File Form 3520, Annual Return To Report Transactions With Foreign Trusts And Receipt Of Certain Foreign Gifts.

Note: An estimated one million Americans have offshore accounts. And the IRS is taking notice. Although having a foreign bank account is perfectly legal, some individuals attempt to funnel their income to an offshore account to avoid paying taxes on it. Because foreign accounts can and are being used to evade taxes, individuals with foreign accounts may be more likely to be audited. Simply report your income from these accounts, and you won’t have anything to worry about.

8.       Take care when selling stocks or bonds. The IRS compares the amount of proceeds shown on your Form 1099-B to the sales price of the stock reported on your Schedule D. You generally report the 1099 amount in full. You then report your cost basis in the security to determine your gain or loss. For example, if you buy stock for $2,000 and sell it for $5,000, report the $5,000 as the sales price and the $2,000 as your cost. Your Schedule D will show your gain of $3,000.

Liz Soria de Express Tax & Bookkeeping Services.

Tags: Free Tax Tips

This entry was posted on Friday, January 1st, 2010 at 8:08 am and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.