Finances & Money

What You Should Know About Audits

Each tax season, tax experts J.K. Lasser send useful articles to various personal finance bloggers to provide to their readers. I’d like to present you with this week’s article about the dreaded “A” word:

No one should be afraid to take a deduction if it is real and you have the records to support it. How do you avoid an audit? Be honest, keep good records, and try in good faith to follow the rules. You may still be audited, and even owe a bit more, but odds are you won’t be left imprisoned or impoverished.

7 Audit Tips

If there is a golden rule for audit, it is to not offer more information- spoken or written- then is absolutely necessary. Don’t give the auditor any reason to expand the scope of the audit.

1. Don’t Ignore the Notice
2. Organize your records. Making the auditor’s job easier may help the process go more quickly and will help create the impression that you are an organized person.
3. Replace missing records. If you can’t obtain a duplicate copy of a missing record look for other ways to support your deduction. Diaries, logs, and other contemporaneous records may help support your claim.
4. Bring only what you’re asked for. Additional records and items not requested in the original audit notice should be left at home. That way, if the auditor is curious about something else on the tax return, but the item was not on the original audit notice, you can politely tell him or her that those records are at home.
5. Stay on point. The auditor will be able to obtain some very valuable information during what seems to be simple and friendly discussions. When you meet with the auditor, in essence, you’re providing testimony. So answer as many questions as possible with a simple “yes” or “no” response. If you must expand or explain, keep it brief and very much to the point. Don’t give the auditor a reason to expand the audit just because you tend to ramble on.
6. Provide only copies. If you bring original records, do not give them to the agent. Allow the agent to make copies but make sure you retain the originals. You must be careful because the IRS isn’t responsible for lost documents.
7. Know your rights as a taxpayer!!

Audit Red Flags

In general, red flags are assigned to any aspect of your tax forms that seems inconsistent with other reported figures. So, if you donated 75% of your net income to charity or work from home, but claim generous travel and entertainment deductions, it will catch someone’s attention:

• Substantial business meal and entertainment deductions
• Excessively high income compared to previous years
• Large deductions relative to income
• Excessive home office deductions
• Losses from a hobby rather than a business venture
• Low income, but significant business deductions
• Non-cash charitable deductions

Discrepancies between different tax forms are big red flags. For, instance if you’re a freelance writer or accrued interest on a bank account, you should receive a Form 1099 information return documenting how much you earned. You are assured some contact with the IRS if the tax return doesn’t accurately reflect the information returns on file with the IRS.

For more on what can work for you, against you, and how to do better this year, see J.K.Lasser’s Your Income Tax 2008 and the Supplement at www.jklasser.com.