- Category: Individual Taxes
- Written by Madeline Delanni
- Hits: 4405
I don't know a single person in the USA who would hear the words "tax audit" without feeling a bit queasy. Those two words seem to strike as much fear as the dentist for most folks. And, you can best be sure that anything they find is bound to cost a pretty penny. What can you do about it?
So what's the good news? Well, chances are the Internal Revenue Service (IRS) won't be calling you anytime soon. During 2009, less than one percent of those who made under $200,000 were audited. Interestingly, about three percent of those who made more were audited. If you were fortunate enough to make more than $1 million, that target on your head made it easy for six percent of you to be audited.
Still, there's no need to tempt the beast! Pay your taxes and let the IRS go after the careless and fraudulent cases.
Here are a few things to help you avoid getting audited, and what to do if the worst case scenario does indeed happen to you.
Avoid IRS Red Flags
There are certain things the IRS looks for when deciding who to audit. Do your best to avoid these categories if you can help it:
- Checkered past: If you've run into the IRS before, chances are they haven't forgotten about you. Your best bet is to make sure you're in good standing with the IRS. Pay off all your tax debt.
- High-income earners: As mentioned above, the more you make, the more you stand out, though making less money to avoid an audit is kind of like cutting off your nose to spite your face.
- Self-employed/small-business owners: The chances are if you reported a large business loss for the year, the IRS will be paying attention. That's especially true if you claimed a lot of business expenses as well.
- Home office deduction: If you're going to file your home as a deduction, you'll need to prove that you actually use it as an office for work. You need to prove that your home office is clearly distinguishable from the rest of your house.
- Large charitable donations: Talk about giving until it hurts. If the IRS notices a large charitable write-off, they're going to make sure it's legitimate. If you're giving cash, make sure you keep the receipt. If you're giving items, keep detailed records like appraisals, photos and letters from the organization you made the donation to.
- Bad math: It seems self-explanatory, but you'd be surprised how common this issue can be among most people. Make sure everything adds up. If the IRS notices a sudden drop in income, or unusually high deductions, they're going to think something fishy is going on.
Keep Impeccable Tax Records
Just because you probably won't get audited doesn't mean you shouldn't keep your books organized. It's always a good idea to have a firm grasp of where you stand financially. By keeping your books in order--as best you can, of course--you don't have to fear if an auditor comes calling.
These days, keeping your tax records organized is easier than ever. Instead of finding storage for binders upon binders of forms, receipts and so forth, you can keep them electronically on your computer's hard drive. If you're prepared then there's no need to fear for what may or may not come. That's peace of mind no tax refund can top.
Surviving Your Tax Audit
So you did everything you could, and you still got slapped with an audit. Sometimes these things are just unavoidable. However, that doesn't mean you're helpless. In fact, there are a lot of things you can do to improve your prospects of coming out unscathed.
- Taxation with representation: If you didn't prepare your own taxes, the onus might be on your preparer to defend your filed return. If you did it yourself, you could look into hiring a certified public accountant or tax attorney to help represent you.
- Snail mail: The majority of audits are conducted through the mail. This is where keeping pristine record books comes in handy. Keep a record of any forms, receipts, etc. that you send to the IRS, and do it through certified mail for proof that you sent it.
- Take your time: It isn't a good idea to rush through your audit. If you can't get all your records together in the allotted 30 days, you can always file for an extension. It's more important to be accurate than early.
- Mum's the word: If you have to schedule a sit-down meeting with an auditor, never volunteer more information than what the IRS formally requested. If the meeting is at your place of business or home office, it's a good idea to get everybody on the same page as well.
- Access your options: If the auditor finds you owe back taxes, or worse, that you must pay penalties, have them put it in writing. You can discuss any disagreements with the auditor's supervisor. If not, you could always file for an appeal.
- Paying the piper: When all else fails and you have to pay, try negotiating with the IRS on the amount owed. You can also set up a plan to pay off the debt in installments.
Dealing with taxes is seldom a pleasant experience, but if you keep your books organize and avoid being greedy, you can actually alleviate a lot of stress and apprehension of facing the IRS.