| The mere thought of an IRS audit strikes fear into the | | | | same as income on the mortgage application. |
| hearts of the brave and courageous. Taxpayers have | | | | 2: They have a pretty good idea of what it costs you |
| reason to fear the IRS inquisition; audits are designed | | | | to live. That is how much you should be spending for |
| to make believers out of the heathen. The feds have | | | | groceries, transportation and other items of a normal |
| enormous clout and are ready to use it if they think | | | | household. Combined with mortgage and other loan |
| you have been fudging. | | | | information, what you have reported along with |
| Understanding the system can help you dodge the | | | | deductions you have taken the feds can arrive at a |
| audit bullet. | | | | fairly comprehensive household budget. If you fall very |
| An IRS audit is not a notice. The IRS service centers | | | | far outside the averages your story had better make |
| generate millions of notices every year telling | | | | sense. If you live in an apartment it might be a tough |
| taxpayers they have overlooked reporting of some | | | | sell to tell them you don't buy much food because you |
| item of income on their return, or other adjustment. | | | | eat out of your garden. If there is not enough reported |
| The notice will recalculate the tax due and ask for | | | | income to support your lifestyle you will be asked how |
| payment or occasionally inform you of a refund. | | | | you are maintaining it on your income. This is how Al |
| An IRS audit letter will demand you to come into the | | | | Capone found himself on the way to prison. |
| IRS office or worse yet, inform you of a scheduled | | | | 3: They know what the average deductions should be |
| visit by an IRS auditor at your place of business. | | | | for your income range. These numbers are published |
| The IRS does not audit a large percentage of tax | | | | on the internet and you can look them up. If your |
| returns. They don't have to. They have vast | | | | deductions exceed the average by a certain |
| databases of information to identify their targets. You | | | | percentage and the exact percentage is a secret, |
| are at a disadvantage dealing with them they know all | | | | they add points to you DIF score. A high enough DIF |
| about you and you shouldn't count on the IRS missing | | | | score and your return will get reviewed for possible |
| anything. | | | | audit. Experience tells us exceeding the averages by |
| Audits are normally not blind fishing expeditions; the | | | | around 15% is about the magic number to increase the |
| audit letter will contain a list of items the IRS wants to | | | | odds of an audit. Normally an agent does not know |
| look at. Frequent items of interest to the IRS are travel | | | | why a return has been pulled for review, although they |
| and entertainment, auto expense, meals, miscellaneous | | | | have the list of what they should be looking for on that |
| expenses, underreported income and repairs. Auditors | | | | return. |
| are equipped with an industry specific checklist. These | | | | 4: Stay off of round numbers. Round numbers on your |
| lists include likely tax problem areas in your line of | | | | return are a flag; it tells the IRS you are using |
| business and items to be reviewed. | | | | estimates and not keeping careful records. Mileage |
| The auditor has some discretion to examine other | | | | and meals are two high target areas, because this is |
| items that arise during the audit if they suggest | | | | often where something is hidden. Maybe you didn't go |
| problems. | | | | 12,000 business miles during the year maybe it was |
| The best way to deal with audits is to avoid them. You | | | | 11,917. Meal expense of $3,000 may be about right but |
| should approach the federal tax system and the | | | | $2,983 looks like you are a better record keeper. |
| preparation of an income tax return the following | | | | 5: Missing income. This is a killer. Making a mistake on |
| assumptions clearly in front of you: | | | | deductions is one thing but forgetting to put down |
| 1: Don't count on hiding anything. If you did anything | | | | income can be a ticket to court. Generally if it is |
| financial and left a paper trail the IRS will know about it. | | | | detected you are underreporting your income the |
| If you have an expensive boat, they will ask how you | | | | auditor starts assuming you are pulling something and |
| paid for it. They check with all third parties, auto | | | | they will no longer give you the benefit of any doubt. |
| registrations, property records, bank records they will | | | | There is no way to guarantee avoidance of an audit, |
| know about any records you have with them. If you | | | | the selection process is a carefully guarded |
| applied for a mortgage and fudged a little on income, | | | | government secret, but a heads up on the above |
| to make yourself look better you will be asked to | | | | points and careful documentation in troublesome areas |
| explain why your income on your tax return is not the | | | | avoids a lot of grief. |