Friday, March 15, 2013

Minimizing the Risk of an IRS Audit

The IRS monitors tax returns for items they consider to be red flags and pulls those returns for a more thorough review or full audit.  If you want to avoid this extra attention, here are some items to pay particular attention to:

·         Be Sure to Report All of Your Income – don’t forget that employers must report income they paid you to the IRS.  So, the IRS has a secondary source of information about your income, whether it is from wages on w-2s or from 1099s.  If you claim a different amount of income, even if it’s a minor variation, it will raise red flags which could trigger an audit. 

·         Abusing Home Office Deductions – be careful to adhere strictly to IRS guidelines when claiming deductions for a home office.  This is an area that has been abused extensively in the past, so the IRS is particularly sensitive and audits returns claiming this deduction more often.  The office cannot be used for any purpose other than as a home office.  You cannot store non-office items in the closet or in a corner, the kids cannot play in the room and you can’t watch TV unless for business purposes. 

·         Making a Mistake on Critical Data – a significant addition or subtraction mistake or the inadvertent transposition of numbers on a Social Security number or other number on your form can trigger an audit.  While the error may seem minor to you, it may raise those red flags.

·         Use of a Personal Vehicle for Business – be careful when claiming the use of a personal vehicle for business use.  This is another area that has been abused in the past, so the IRS pays special attention to it.  As with home office deductions, follow the rules carefully, and maintain a detailed log of your trips including dates, mileage and destinations. 

·         Business Entertainment – this is another area with significant past abuses.  Again, keeps a detailed log of each claimed event including the date, what the event was about and who was there. 

·         Claiming Credits for Which You Are Not Eligible – numerous tax credits exist out there, and the IRS has seen increasing numbers of taxpayers claiming credits for which they are not eligible.  As a result, they are watching tax credits very carefully.  Be sure to claim only those credits you are entitled to claim, and maintain appropriate documentation of your eligibility.

Nothing can completely prevent an IRS audit.  The IRS always selects some taxpayers at random and, at some point, you may become one of those lucky ones chosen.  But, you can minimize the risk of being selected for an audit because of red flags by being careful with your return.  Claim only what you are entitled to, report everything, follow IRS guidelines and double check your numbers, including addition and subtraction.  An additional safety net is the use of a tax professional to prepare your return.  He or she will know many of the red flags and can help you avoid them.  If by chance you are audited, this person will also handle the audit for you with experience and professionalism. 


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