6 Ways to Avoid an Audit

CondoCruiser · Feb 2, 2011

http://money.msn.com/tax-planning/6-ways-to-avoid-an-audit-schnepper.aspx?gt1=33005

6 Ways to Avoid an Audit

There's no sure way to avoid a tax audit. Well, actually, there may be, but I don't recommend it.
I know a preparer who suggests avoiding an audit by underpaying income tax by $10. While those dollars are outstanding, the return goes to collections, which minimizes, according to him, the opportunity for the audit division to focus on your return. He considers the penalties and interest on the $10 owed to be minimal insurance to shrink your exposure.
Most audited tax returns are selected for review either because the filer is part of a target group or because a computer program selects the return. The computer system selects many returns randomly, but there are red flags that will draw the Internal Revenue Service's attention.

Energy tax credits for 2010

The key is to minimize your exposure. Here are some things you should try to avoid:

1. Math mistakes

The biggest reason people receive letters from the IRS is addition or subtraction goofs. Fortunately, math errors rarely lead to a full audit. Still, double-check your math before you send in your return.
And if you receive a letter from the IRS saying you owe money, check your numbers first. Sometimes, an IRS employee misreads one of your numbers, or the number is keyed into the IRS computer system incorrectly. If the agency is wrong, send a letter with a printout of your calculations.

Jeff Schnepper

2. Mismatched interest and dividend reporting

If the amounts reported in supporting documents don't match the amounts on your return, you will get a letter.
There are lots of possible errors here. Sometimes, the IRS will enter Form 1099 information (investment, interest and other nonwage income) into its computers and erroneously key in the income amount or the Social Security number of the recipient. If the income isn't yours, get a letter from the bank or other payer and forward that letter to the IRS. If the amount is incorrect, send a copy of the Form 1099 mailed to you by the payer.

3. You're on the IRS hit list

Those who receive much of their income in cash are traditionally on the radar screen of IRS agents looking for unreported income. Be prepared to defend any non-income deposits into your accounts. Recently, the agency has also pinpointed small-business owners and the self-employed. Too many "business" cars were going to campus each September. Be prepared to substantiate your deductions.

4. You have a big mouth

Never brag about how you put one over on the IRS, especially on Facebook. The IRS has been successfully trolling such sites to find unreported income and tax cheats.
Internal Revenue Service whistle-blowers can earn rewards of 15% to 30% of the additional tax collected, including fines, penalties and interest. Scofflaws can be reported by filing Form 211 (.pdf file) or calling the IRS fraud hotline at 1-800-829-0433.
Everyone else: Zip it. Keep your accounting strategies to yourself.

5. You're exceptional

An IRS computer program compares your deductions with 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 revenue through audits.
Check programs like TurboTax's deduction finder and books like my "How to Pay Zero Taxes" to ensure you're getting all the savings you deserve.

6. You have the wrong preparer

Let's face it: Some tax preparers are less than professional. Some, unfortunately, are crooks. If your preparer promises you a refund before checking all of your paperwork, run as fast as you can. That preparer is going to be taking illegal or inflated deductions, and, when the IRS finds out, you're going to be the one who pays the bill, plus interest and penalties.
On the other hand, you may qualify for a reward if you report your criminal preparer to the IRS fraud hotline.

Make sure you're withholding the right amount using a program like TurboTax's paycheck analyzer, or check Circular E from the IRS. You can download a copy from the agency's website.
If the IRS is coming . . .

If you are facing an audit, don't panic. An audit is merely a process in which the IRS asks you to substantiate the numbers on your tax return.
Here are three survival strategies:
Call your tax professional. Or get one. If the audit is simple -- to prove your charitable and interest deductions, for example -- you can do it yourself by mailing the IRS copies of your substantiation. For all in-person audits, I strongly suggest professional representation.
Plan your taxes to pre-empt an audit. If, say, you have a huge medical deduction that you feel would increase your chances of being audited, attach copies of your medical bills to your return. The IRS computer might still kick out your return, but when a real person looks at it, the reviewer will recognize that you know the rules. This may reduce your odds of a full audit.
Keep records for three years. Normally, the IRS can audit you for three years after you file your return. In reality, however, most returns are audited within 18 months. 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.
The IRS has announced that it will not audit a taxpayer for more than five years in a row on the same issues. Personally, that doesn't give me much comfort. Once the deadline has passed, the IRS normally cannot audit your return, and your expenses are insulated from examination.
File at the last minute if you are concerned about a potential audit. It won't hurt and might decrease your chances of being selected.
The good news: If you are audited one year with a refund or no change, it decreases your odds of being audited in subsequent years. In fact, if you are audited on the same items two years in a row with no additional taxes due, the IRS manual specifically recommends not auditing you on the same items for a third year.

Jeff Schnepper is the author of the best-selling book "How to Pay Zero Taxes," which is in its 28th edition. He is a former professor of taxation, accounting and finance. Schnepper now has a full-time tax planning and legal practice in Cherry Hill, N.J. Click here to find Schnepper's most recent articles and blog posts.
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Rerun8963 · Feb 2, 2011

wow...i had just read that on MSN...i tend to keep my tax records for about 10 years though...but that's just me..

123456 · Feb 2, 2011

7.

Do your own taxes.

It's been stated that 70% of truck drivers overpay their taxes !!!!!

G/MAN · Feb 6, 2011

I spoke with someone from the IRS about a year or so ago and she told me that truckers are a group the IRS is targeting.

CondoCruiser · Feb 6, 2011

Everyone else tries to take from us. They might as well get their punches in too.

georgeandson · Feb 25, 2011

good info. thanks!

G/MAN · Feb 25, 2011

All those new IRS agents Obama hired need something to do.

chalupa · Jul 4, 2011

Best software ? Quick books? Hammer lane stuff? Peachtree? Your opinion?

G/MAN · Jul 4, 2011

If you are wanting something specific to the trucking industry I like Trucknpro. www.trucknpro.com. It is simple and easy to use. There are other trucking specific programs. I know some who use Quickbooks Pro. I have used Easy Trucking www.easytrucking.com and Truckers Helper www.truckershelper.com. I don't care for some of the changes that truckershelper has made since they sold the company. Truckershelper has several versions of their software from company driver to fleet owner and carrier and brokerage. Some feel that it is a bit more complex to use than the other two I noted. There is some redundancy built into the easytrucking software. They have two versions which only differ due to the number of trucks you can put under each. The small version limits you to 5 trucks or drivers. It can be problematic if you have several trucks and some turnover unless you want to buy the more expensive version. Trucknpro doesn't have any limit on the number of trucks. You can customize all three up to a point. If you are in the market for trucking software, you may want to take a look at several online and see which works best for you. I know several who use trucknpro and all seem to be happy with the program. Most have an online demo or short trial that you can give it a test drive before making a decision. Most programs for the smaller operator are less than $200. There is no need to spend a lot of money on software.

joshualogan420 · Jul 27, 2011

read this article..http://2290taxform.com/2011/06/13/irs-inspection-on-form-2290-e-file/
it gives all information on how to safeguard against IRS audit

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