ReAnn Rothwell’s Money Saving Ideas, Tax & Organizing Tips

I do not want to be audited! What can I do?

Find a four-leaf clover and avoid black cats!  J

To some extent, being hit with an audit is just bad luck. The IRS says it audited 1.38 million taxpayers in 2007, up 7% from 1.29 million taxpayers in 2006. That is the highest number since 1998.

How are you picked?

An IRS computer program compares your deductions to others in your income bracket and weighs the differences. This secret IRS formula, called the DIF Score, is used to select returns with the highest probability of generating additional audit revenue. Generally, as your income increases, so does your chance of an IRS audit? However, even if you do not do anything to raise an IRS computer’s eyebrows, you could end up being plucked at random.  

Outsize deductions are a red flag!

Make sure that your itemized deductions are realistic. (Writing off more than 25% of your income would very likely get your return marked for review.)  While the IRS used to look hard at the home-office deduction, the emphasis these days seems to be on people reporting small business losses on Schedule C. The percentage of returns filed by sole proprietors (filing Schedule C of Form 1040) and audited by the IRS is nearly three times higher than returns filed by employees.

Be prepared to substantiate your expenditures as deductible expenses!

As long as you have backup, you should claim what you are due, even if doing so might raise the likelihood of your being audited.  Auto, travel, meals and entertainment have been the areas most audited. To deduct auto expenses, you must establish the percentage of business use as well as the actual expenses incurred. A written diary of miles used for business is essential.

You must have a receipt for all expenditures of $75 or more for meals and entertainment. The rule is simple: no receipt, no deduction.

Do you get your income in cash?

The IRS has specific audit programs aimed at specific professions and occupations. Because they receive much of their income in cash, people who work in the gaming industry, waiters and even doctors are prime audit targets. The more cash you receive and the higher your income potential, the more likely the IRS is to find additional tax dollars by reviewing your return.

Check your math and numbers!

Do not want to hear from the IRS at all? Go back and check your numbers. Even TurboTax and Tax Cut cannot stop you from keying in the wrong digits. These simple mistakes will not lead to an audit, but they could trigger an “assessment notice” - in other words, a bill.

In Closing:

The IRS can audit you for three years after you file your return. In reality, however, most returns are audited within 18 months of filing. This gives the IRS time to do the review and request the appropriate substantiation before the statute of limitations (usually the three-year period) ends.

Remember, tax evasion is bad, tax avoidance is perfectly legal.  An audit certainly will not be pleasant; however, it should be bearable and affordable if you have the proper paperwork to make your case.