The Ins and Outs of Audits
According to the Kiplinger Letter, random federal tax audits are starting up again in October after a brief hiatus – about 13,000 taxpayers will receive letters. These are the infamous “line” audits, designed to provide a database to be used in designing guidelines for more efficient inspection of returns. Agents will reportedly be looking specifically for hidden or underreported income and exaggerated credits and deductions listed on Schedules C (profit or loss from business) and F (profit or loss from farming).
The government has been focusing for awhile on the increasing number of self-employed individuals. Even if you dodge the bullet for now, it’s always smart to be vigilant against the expensive and stressful possibility of a tax audit. A qualified tax professional can assist you in the preparation of your return to minimize the chances of an audit coming your way.
There are three types of audits:
- Correspondence audits happen when the IRS sends a letter asking for clarification on relatively simple items. It’s usually handled and completed through the mail.
- Office audits are conducted on the IRS’s turf. You meet with an examiner who wants to see documentation intended to answer their specific questions. It’s wise not to volunteer any other information beyond what they ask.
- Field audits are the stuff of TV cop shows. That’s when the IRS comes to your home and starts nosing around to see why that Bentley is sitting in the driveway of someone who reported $28,000 in income last year. These tend to be pretty serious.
There are some obvious no-no’s that shift your return to the audit pile. The following measures won’t guarantee you’ll avoid an audit, but they’re key issues that the IRS focuses on when deciding which returns to target:
Messing up the basics: This is an obvious point, but remember to sign the return, add the Social Security Number and double-check the math. Fill out every applicable line on the return, or better yet, get a tax preparer to do it since professionally prepared returns tend to be easier to read and understand because you’re paying qualified people to get it right. Bottom line -- sloppy returns tend to draw scrutiny.
Rounding can be a problem: Precise numbers suggest precision. It’s always best to show conservatism to the IRS. Round down to cut off the pennies, but rounding up to the next hundred or thousand tends to draw attention.
Note sales of investments carefully: Anytime you sell stocks or bonds, the IRS and the taxpayer receives a 1099 noting the sale price. Your tax professional can go over the proper way these should be noted on your return. Also remember that income items such as interest, dividends and other sources of income are matched with the return from documents that are already on file with the IRS.