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How to Avoid a Tax Audit

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Red FlagsNo likes the idea of going through a tax audit. Indeed, many of us get downright nervous about being audited. There is no way to completely avoid an audit; some IRS audits are performed randomly. You never when your number will come up. Most audits, though, are performed because of some red flag the IRS sees when looking at your tax return.

If you want to reduce the chances that you will be audited for something that is in your tax return, you will need to be careful about you fill out the forms. For the most part, avoiding IRS red flags is fairly simple: Only take the deductions and credits you are actually entitled to, and double check your return for mistakes.

IRS Audit Red Flags

In addition to large deductions relative to your income, tax credits (like the EIC) that you might not be entitled to, and mistakes on your tax return, there are a number of other red flags that are avoidable:

  • Claiming a business loss on Schedule C regularly: A sole proprietorship filling out a Schedule C might be expected to claim a loss for a couple of years. However, if is seems to be a habit (and there are computers to help figure this stuff out), you might be audited one year. Business use of your home used to be a big red flag, but with the recent increase in home businesses, this isn’t as big a deal.
  • Failing to report all your income: Remember that you are expected to report everything you make. Even if you don’t receive a 1099, you should still report the income. The government may have a copy of the 1099, or the government may come looking. Don’t forget that, soon, PayPal will have to begin reporting transactions to the IRS.
  • Handwritten tax form: The IRS has found that handwritten forms are more likely to contain mistakes. You can have a tax preparer put together your return (avoid a preparer that has been red-flagged by the IRS), or you can use tax prep software. The IRS even has fillable forms available for free.

And, because the IRS wants you to e-file, it is worth noting that these returns are less likely to be audited. (Although you could still be hit with an audit for red flags or randomly.)

Tax Preparation Packages

Company Package Price Notes


Intuit
TurboTax Deluxe $49.95

Free for 1040EZ &low income, Deluxe imports last year’s return, full Form 1040 filing. Free e-file.

More



2nd Story Software
TurboAct Deluxe $9.95

Free for 1040EZ & low income, Deluxe + State for $17.95, Deluxe includes all IRS forms. Free e-file.

More



H & R Block
Deluxe $49.95

Free for 1040EZ & low income, Deluxe for homeowners & investors, Free e-file.

More



Petz Enterprises
TurboBrain Deluxe $39.95

1040EZ for $14.95, 1040 Deluxe for $39.95, Tax Expert available at $129.95.

More


How to Prepare for an Audit

In spite of your best efforts, you might still be audited. The statute of limitations is three years for an audit, but if the IRS suspects tax fraud it is extended to seven years. In most cases, resolving the issue is simply a matter of providing the IRS with the documentation to back up what’s in your return, whether it is a receipt, interest statement, mileage log or some other form of documentation. Make sure you keep good records, and store supporting documents and information with each year’s tax return.

If sending in documentation is not sufficient, you may have to meet with someone. Realize that you can have a representative take care of matters for you. If I am ever audited, my accountant, who prepares my return, would represent me. In those cases, you might never have to meet with someone. If you do meet, you can choose a place and time that’s convenient for you. Many experts recommend that you avoid doing an audit in your home. And bring only what is asked of you, and don’t volunteer information that could be used to open another investigation.

Do you have tips for preparing for a tax audit?

(Photo: rvw)

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10 Responses to “How to Avoid a Tax Audit”

  1. Strebkr says:

    Don’t cheat???

  2. Huskervolleybfan says:

    My Mom and Dad were barely middle income folks who worked in sales. They were audited several times. My Mother’s trick (she was a corker!) was to make her appointment for the latest time possible on Friday afternoon. She would show up with reams of grocery receipts,etc. The auditor would be looking at the clock and at my Mom’s “back-up”, the audit never lasted long!

    • mikestreb says:

      Well played… That is a fantastic idea! I will keep that in my back pocket for IF I ever get audited.

    • skylog says:

      that is too funny! i am, i guess a little shocked that it was so effective. what exactly is a “corker?”

      • Shirley says:

        A “corker” is an old term meaning a female who keeps everybody jumping by doing the unexpected and/or pushing the limits. It definitely has a positive connotation.

        “Its an English word… A corker was the chap who put the cork into a bottle. When we went to war with France it was diffcult to get Brandy, the favored drink in the 1800′s, until we started the liberation of Portugal, and developed the port trade in Oporto… Thus anything of great quality, or rarity was termed a corker. Today it can mean, a person or thing that is especially good, attractive or amusing.”

  3. Justin says:

    This is my second year running a business out of the home. I just submitted my taxes, but hopefully that fact that my businesses went from a small loss the first year to a small profit this year looks okay to the IRS. Guess we’ll see!

  4. Strebkr says:

    I believe the profit test is 2 of 5 years. If after 5 years you have not showed a profit in atleast 2 years, the IRS might come back and say your business is not a business, but rather a hobby. You can still write things off, but only to the extent of your income. So the largest loss you could have would be a 0.

  5. scott says:

    Be more careful doing your taxes than the writer/editor of the article was.

    Two missing words in the first paragraph alone: sloppy.


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