Two words strike terror in the average heart: tax audit.
Your imagination may conjure up pencil-eating ogres eager to shred you alive, but relax. They’re only going to shred your return. A tax audit is simply the IRS process of determining the accuracy of the income and deductions on your tax return. And yours are perfectly accurate, right? Then why are you being audited?Why you?
“Why me?” you may wonder. Only six tenths of one percent of returns is audited, so how did you get so lucky? Bad karma? Maybe not.
Sometimes the IRS computer randomly chooses a return for a tax audit, and random tax audits tend to be thorough. But in general, an audit is triggered by something out of the ordinary on your tax return.
Did you make an error in addition? Double and triple-check your math or the IRS will call you on your mistake. Even a decimal out of place may prompt a tax audit. Math teachers applaud this, but it’s hard on the rest of us.
The more income you claim, the more likely you are to be audited. That’s no reason to make less money, just know that people with high incomes are more likely to be hit with a tax audit than regular people.
If your business write-offs are higher than is average for other businesses in your field, a tax audit may be the result. So don’t write off invisible expenses.
You’re a generous person, and you make a lot of charitable donations. Good for you. But put too high a number in the charitable deduction box and the IRS may want to talk to you. If your charitable contributions add up to a significant percentage of your income, the IRS may audit. Just make sure you have a receipt for those hardback books you gave Goodwill.
Do you run a business from your home? You get to write off a percentage of your household expenses. How cool is that? The trade-off is that the IRS likes to look deeply into home-based businesses, so chances are good that a home office tax audit is in your future.
Are you bartering your services for goods? You washed your neighbor’s car and he gave you a free turkey? The value of those goods is taxable income, so don’t leave it out. The IRS wants to gobble up its share.
Get a free case evaluation today at 818-649-8552.Three Types of Audit
No matter how the IRS chooses you, you may face one of three types of tax audit: mail, office, and field, in order of seriousness. A tax audit is also called an “examination”. Kind of like going to the dentist.
In a mail tax audit, you get a letter from the IRS requesting further documentation. Basically, proof of the numbers on your return. You send that back by mail, and if they accept it, you’re done, with no additional taxes owed. Make sure you mail your response back by the due date, or you’ll wind up in deeper trouble.
But what if the IRS wants you to pay more taxes? If you don’t think this is right, you can do a phone call with an IRS examiner. If you’re still not happy—and you know the IRS wants you to be happy—you can jump up your complaint to a manager. Still not thrilled? Take your case to Appeals, then Tax Court. If you and the IRS don’t reach an agreement, the IRS will mail you a Statutory Notice of Deficiency. You have 90 days to petition the Tax Court.
An office tax audit is more in depth than a mail tax audit. In an office tax audit, you have to go to the IRS office, probably not your cozy place, and the IRS agent may directly ask you questions about items on your return. You may have to bring your bank statements and business books. You’re allowed to be represented by an Enrolled Agent, tax lawyer or your CPA.
If the IRS feels it has to examine your records in minute detail, they will visit you at your home or office. That’s called a field tax audit and is the most thorough type. They may want to look around at your physical assets, like business equipment and expensive art. This is the snoopiest audit.How to Avoid a Tax Audit
Are there any ways you can avoid a tax audit?
- Keep careful records, and know what “income” is and what’s not. Alimony is income, while child support is not. Fringe benefits are taxable.
- E-file, because according to the IRS, e-filing reduces errors, and therefore reduces the chances of a tax audit. Tax preparation software can give you expert help and watch out for problems. The error rate for electronic returns is only five-hundredths of a percent. Compare that to the error rate of paper returns, which is twenty-one percent.
- Make sure you report all the income you earn on 1099 and W2 forms, because the numbers on your tax return must match what your employers and others paid you. IRS software called the Discriminant Index Function system / score matches these numbers up. If it finds discrepancies, you may be audited.
Get a free case evaluation today at 818-649-8552.What to Do in Case of a Tax Audit
Don’t talk about it. Loose lips sink ships. Don’t discuss your tax problems with anyone but a tax professional, Enrolled Agent, tax lawyer or your CPA or the IRS itself, because whistleblower laws make it profitable for friends and neighbors to tell on you.
If you win the tax audit lottery, don’t despair. Call us today; we represent individual and business taxpayers before all administrative levels of the IRS at 818-649-8552.
A tax professional can work with the IRS on your tax audit so you don’t have to face it yourself. Each year the IRS pays out over a billion dollars in refunds to lucky people like you who it audits! So cross your fingers. And call Mike Habib. That’s even better than crossing your fingers!