How to Avoid an IRS Audit
February 25, 2013The IRS is a universally feared agency and for good reason. The IRS can garnish wages, seize bank accounts and lien property to those who owe them money! That is not their first course of action of course, but they have the power to do all of those things so getting a letter in the mail from the IRS is something everyone wants to avoid. Here are some tips on how to do that:
Don’t brag about your deductions. You never know who might be listening. My uncle was an IRS agent and years ago when my family was shopping to purchase a farm in the central valley in California, my Uncle Creed came with us to scope out farms. One of those properties was a pig farm (thanks goodness we ended up with an orange grove) and the farmer kept telling my father (with Uncle Creed by his side) all the things he could write off since he owned a farm. “See that wood paneling in my game room? Well, I write that off as ‘lumber.’ See that truck over there? Well, I write that off as a farm truck,” and so on and so on. On the ride home, my father said, “That fellow probably didn’t know you were an IRS agent, did he?” My uncle just smiled. I am sure there was a follow up audit or two.
Declare all of your interest and dividends. The IRS gets a 1099 for all of your bank accounts and investment accounts so make sure you add in all of your interest and dividend income on your 1040. If they are missing something—unreported income — even something small, they will probably catch it and that of course brings unwanted attention to your tax return.
Watch out for higher than average deductions. If you are trying to write off way above the norm, that’s a red flag. Are your charitable deductions high for your income? Do you write off employee business expenses up to the maximum allowed? If you have deductions that are out of the norm, you can write them off but just keep extremely accurate records in case you are audited. If you use a tax prep service like Turbo Tax or HR Block, they’ll point out some of your deductions that may trigger an audit and you can choose to take them or not.
Math errors. Preparing a tax return can be overwhelming for some with all the different schedules involved. For many, it may be the only time during the year they are performing this type of function so it is easy to make an error. Unfortunately, an error could cause a second set of eyes to review your tax return. It is worth the time to set your tax return aside and give it a final look before you send it out.
Forgetting to sign your return. No explanation needed here. Human error. Forgetfulness. This is actually one of the most common mistakes people make besides reporting the incorrect Social Security number.
All that said, an audit isn’t the end of the world and it’s not even that bad if you are prepared. I have been audited twice and both times I “won” in that I didn’t owe any more money. Since I had accurate records, I was able to defend every point the IRS made. At the same time, I must admit having a shiver of fear run down my back when I opened the envelope bearing the return address from the Internal Revenue Department informing me of that audit and I’d rather not be in that situation if I don’t have to be.