TAX AUDIT TIPS
There are two areas of tax audit tips. The first are tips to avoid and audit and the second is tips to know once you have been selected for an audit.
Tips to avoid an audit:
- The easiest way to avoid an audit is to either use a tax preparation program or have your returns professionally done. Many audits are caused by math errors. Manually prepared returns are prone to math errors.
- Taking certain deductions such as home office should be avoided unless you are certain you qualify for that deduction. If you have a business that operates primarily with cash—keep good records to support the amount of income reported.
- Alimony is taxable. The IRS now matches deductions for alimony from one spouse with alimony income reported by the other.
- Keep automobile mileage logs. One of the most commonly audited items are automobile logs for self-employed persons or employed individuals using their auto for business purposes. Keep a log that charts the beginning and ending odometer readings, location and reason for the trip.
- If you take a charitable donation keep track of the date of the donation, the receiving organization and the amount of the contributions. Try to pay with a check and obtain a receipt from the charity for donations exceeding $250. If audited, you should be prepared to also give the IRS the original value of the items donated (non-monetary) and their fair market value at the date the donation was made.
- Avoid offshore credit cards. People put money in an offshore account to avoid paying taxes on the interest. This is a great way to volunteer for an audit.
- Take care when selling stocks and bonds. Report the amount received and the amount paid. Reporting just the net amount as a capital gain or loss will generate an IRS letter.
- Sign the return. An amazing number of clients were audited for not other apparent reason other than for not signing the return.
- Sometimes clients do not report income because they think it is “way under the table.” However, if they person who paid you claims a deduction and files a 1099 or is audited, you may find an IRS auditor on your doorstep.
Tips to remember if you are audited:
- Always provide anything the IRS asks for within the requested amount of time.
- Do not give the IRS originals. Always provide a copy of the original. There are many horror stories of originals being lost or misplaced by the IRS and taxpayers are denied a deduction because they don’t have adequate records to substantiate their deductions.
- The number of years to retain your tax records depends on the item in question. We suggest that clients keep their records for 7 years.
- It is a crime to deliberately provide misinformation on your IRS tax return under audit.
- Bring the documentation to support the items under question. Do not bring any documents other than the ones you need for the issues being questioned. You do not want the auditor seeing other documents that might bring up additional issues.
- Never volunteer information. Only give the auditor information they specifically request.
- Never lie to the IRS. If you don’t know the answer, tell them you don’t know and will get back with them with the answer or information they questioned.
- Only give us the information we request if we are representing you. If the Auditor asks us questions that are outside of the issues, we cannot provide them with additional information. This often puts a roadblock for potential other areas the auditor might want to get into if you go to an audit.
- File extensions on your current year’s tax return if you are under audit. Your current year’s tax return is open for audit if you file it while being audited for prior years. It is better to file extensions and wait until the audit is completed before filing your return. This is especially true if you have being filing incorrectly and likely make the same mistake again on the current year.