Don’t Be a Tax Audit Victim!

Tax Audit, Don’t Be a Tax Audit Victim!

The dreaded tax audit – one of the few events in life that annoy or scare Americans more than actually having to pay their taxes. Even though the chances of getting audited are less than 1% for most Americans, the following advice can assist in tax planning and help protect taxpayers from being a tax audit victim.

Audit Flag #1: Using a Shady Tax Preparer

Some tax preparers may charge a tax preparation fee based on the percentage of a refund check they are able to get for their client. Others may be extra aggressive in what’s claimed in order keep their promise of an extra large tax refund check. But if it turns out the tax preparer made a mistake, it’s the taxpayer who’s responsible for penalties and interest.

Audit Flag #2: Being Self-Employed

It may not be fair, but those who run their own businesses and file a Schedule C are much more likely to be audited than business that file a corporate return. One of the reasons for this is because sole proprietors are more likely to improperly claim business losses and expenses. The classic example is the home office deduction.

Audit Flag #3: Large Charitable Contributions in Relation to Income

Claiming a $5,000 tax deduction for tithe contributions to your church on an income of $50,000? The IRS probably won’t care. Claim a $20,000 charitable tax deduction with an income of $50,000? That’s a red flag, although it doesn’t always mean something is amiss.  Therefore, the taxpayer will need to be prepared to explain the situation and back up the tax deduction with adequate documentation.

Audit Flag #4: Simple Mistakes

Taxpayers need to make sure the avoidable mistakes are, well, avoided. From computational errors to figures from documents not matching up to writing in the wrong social security number, these are all errors that can increase the chances of the IRS auditing a tax return.

Audit Flag #5: Not E-Filing

According to the IRS, e-filing actually reduces the chances of an audit. The reasoning is that e-filed returns are less likely to have simple mistakes that can invite a tax audit.

Audit Flag #6: Using Round Numbers for Deductions

Using a number such as $500 instead of $513 for a tax deduction indicates to the IRS that the taxpayer is either making up the amount or keeps poor records. Either way, round numbers can tip off the IRS that something isn’t right and trigger a tax audit.

Audit Flag #7: Unusual or Large Deductions Without Supporting Documentation

Claiming an unusual or large deduction can catch the attention of the IRS, but by including supporting documentation, the return is merely given a more careful examination and not audited (assuming the documentation adequately supports the deduction).

Audit Flag #8: Overly Excessive Deductions

The IRS can anticipate what the typical tax deductions are for a given taxpayer, whether it’s an individual, corporation or small business. When tax deductions are out of line for what’s customary for that that prototypical taxpayer, an audit could result. For example, it might be expected for a law firm to claim a significant number of business lunches as business expenses, but it would be odd if a florist shop tried to claim the same tax deductions.

What Can a Taxpayer Do If Audited by the IRS?

Despite your best efforts, you may still get audited. This is because random selection is one of the criteria used by the IRS for choosing which tax returns to audit. If an audit occurs, here are some pieces of information and few things that can be done to make the audit process easier.

First, most audits don’t result in an in-person meeting with an IRS agent. Depending on the complexity of the matter, most audits can be handled entirely by mail.

Second, figure out what the IRS says is wrong with the tax return and what additional information they are requesting. It seems obvious, but one of the first things people often do when they get audited is panic and assume the worst. Sometimes, sending in a few documents can get everything sorted out.

Third, the IRS will never notify a taxpayer about an audit via e-mail. Audit notices are made only by telephone or mail.

Fourth, find all the documents and information requested by the IRS in the audit and be prepared to submit them.

Finally, the taxpayer can get professional help. It can be from a Certified Public Accountant (CPA) or tax attorney, but either way, it may be well worth the investment depending on how much money is at stake. If the taxpayer can’t afford professional help, the IRS’ Taxpayer Advocate Service may be able to provide assistance.

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