pwfm Money Monday - Avoid Tax Audit

How to Avoid a Tax Audit

One of the biggest fears when it comes to taxes is

an IRS tax audit. Here's a few simple tips on

avoiding a tax audit.

One of taxpayers’ biggest fears is being audited by the IRS (Internal
Revenue Service). Even if you’re confident that you’ve filed your taxes
correctly, in the back of your mind, you wonder when you’re going to

receive a phone call or letter from an IRS representative. You can worry
a little less this tax season. Here are some ways you can avoid a tax audit.


Certain types of taxpayers are more likely to be audited than others.
These include taxpayers who make more than $200,000, small business
owners and self-employed taxpayers, and taxpayers who could be hiding
taxable income overseas.


One of the biggest triggers for a tax audit is having high deductions
compared to other taxpayers within your same tax bracket. You can
account for high deductions by attaching a receipt or other documentation
to your tax return. While above average deductions can trigger an audit,
being proactive and providing proof will reduce your chances of being
audited. Don’t be afraid to deduct expenses that are legally deductible.
Instead, make sure you can justify the amount of your deduction.
Write checks whenever possible and keep a copy of the cancelled
 check in your records.

Double check your math. Addition and subtraction errors are common
reasons for tax audits. They’re also easy to fix and avoid. Check and
double check your numbers to make sure you’ve included the right ones.


Use tax preparation software. Tax prep software like TurboTax or
H&R Block eliminates math errors that can lead to an audit. They
can also do an analysis of your tax return to let you know any items that
could trigger an audit. Be aware that even tax software can’t completely
eliminate your chances at being audited since the IRS computers audit a
number random taxpayers every year.


Make sure you report income and interest from any 1099s you receive.
The IRS software does a check to make sure the income reports on the
1099s it received for your social security number matches what you
reported. Discrepancies could trigger an audit. If you believe the amount
on your 1099 is an error, contact the issuer to have it corrected. If that
is unsuccessful, you should contact the IRS by calling 1-800-829-1040
for assistance.


Use a reputable tax preparer. You never know what type of reputation
a certain tax preparer has built with the IRS. Your tax preparer should be
experienced with filing the type of return you need. Find out that preparer’s
audit record. Be wary of choosing tax preparers with high audit rates. Ask
that your tax preparer not make assumptions or conclusions about your
records. Instead, request the preparer call you with any questions.


File at the last minute. The IRS receives numerous returns on April 15
and can’t scrutinize them the same way returns filed on February 1
may be. That’s not to say you can avoid an audit all together by filing
later. You just reduce the risk.


Report all sources of income including child support, alimony, and cash
receipts. Child support and alimony received will be tied to your social
security number, so the IRS will already know about it. Though you might
think getting paid under the table will keep you from paying taxes, the IRS
can find out about cash receipts. For example, if you deposit cash into
your checking account, an audit will raise the question of where the
deposits came from.


File your income taxes. No matter what you think or feel about paying
taxes, you’re legally required to do so. Avoiding paying taxes is a crime
and if you’re caught, you’ll face criminal charges and monetary penalties.
On top of that, you’ll have to repay the taxes you should have paid
during the time you avoided paying taxes. A good example of this was
the singer Willie Nelson, who in 1993 had to pay $16 million to the
IRS for evading taxes.