Ask any taxpaying adult one of their worst nightmares, and they will tell you it is an IRS Audit. IRS Audits are the one lottery that no one wants to win. Yet, every year, tax payers are selected for audit due to something on their tax return, or at random. And taxpayers who earn more than $100,000 per year are more likely to face an IRS audit than those who earn less. While nothing will guarantee that you will not be audited, there are some tips that will make it less likely. And, should you be selected for an IRS Audit, these tips will make it less painful.
1. Always tell the truth.
Mom told you that you should always be honest. But as we grow up, our ability to tolerate and even accept 'little white lies' increases. But with the IRS, there is no better advice than to tell the truth. Truthfully report your income, even the $10 interest on that savings account. Do not inflate income, nor under report it. Likewise, truthfully report your deductions and credits. For example, if you or a dependent did not take post-secondary education, then do not claim an education credit. And as a final example, do not claim dependents that are not yours to claim. While this sounds very straight-forward, some taxpayers pad their filing status and exemptions with dependents that they do not qualify to claim.
2. Don't hide income.
So, you think it would be slick to put investments in your child's name. Perhaps that is true if you really intend it for your child. Or, how about hiding unreported income in an off-shore to a tax haven? Well, the IRS is savvy about tracking that as well. Generally, as soon as you slide income into someone else's account as a means to shield it from taxation, you invite the IRS into your financial world.
3. Don't exaggerate expenses/deductions.
The old adage that claiming a home office will get you an audit just is not true any more. But claim that a generous portion of your home is devoted to a home office and you might get a chance to meet an IRS agent face to face. This tip ties into tip number one, but with a spin. Let's say that you have legitimate charitable contributions. Yet, you decide to pad the value of the items and 'add' some items to the list. Or, let's say you purchase a vehicle, slap your company name on and decide that every drive, even the one to your son's soccer game, counts as advertising. This creates a snowball effect that will stand out to the IRS. So, to avoid an audit, don't fertilize real expenses/deductions.
4. Check your math and be complete.
Truly, the cost of a calculator has plummeted in the last 40 years. So, use one! If you prepare your own taxes, triple check your math. Even with a paid preparer, triple check your additions of expenses and deductions. Otherwise, you may fall into a category where an innocent mistake attracts IRS attention. And if you prepare your own return, make certain that all schedules and forms are completely filled out. Many forms have back up schedules and failure to include one may turn the head of an auditor.
Accuracy greatly ties to keeping great records. Great records ensure math accuracy and should you face an IRS auditor, they will demonstrate that you have legitimate expenses/deductions.
5. Keep your financial matters private.
IRS whistleblowers may earn up to 30% of the additional taxes found. So going around talking about how you are so much smarter than the IRS only challenges those listening to earn a little extra income. Of course, they will have to report that income on their return the following year!
If Your Nightmare Comes True
If you pay a tax professional to prepare your return, then ask them up front if they will assist you, should the IRS select your return for audit. Liberty Tax Service offers audit and correspondences assistance as part of their tax preparation fees. Other tax preparation companies may offer this service, but it is usually at an additional cost. Failing to purchase their audit protection package could leave you hanging by yourself should the situation arise.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.