How To Avoid A Tax AuditNext »
The stress of an IRS audit is the last thing you need while dealing with a serious illness. Unfortunately, the large medical expense deductions often reported by people with medical conditions are one of the many reasons why your federal income tax return might be audited.
Following are some tips we have gathered from tax experts to help avoid an audit:
If possible, use a computer to prepare your return. Computer-prepared returns will be processed by a computer and often never looked at by human eyes unless there's a discrepancy or Discrimination Function System selects it for possible audit. If your return is looked at more carefully, and it is messy, it apparently is more likely to be audited.
If you must handwrite your return, do it as neatly as possible, recopying your numbers onto a clean form if necessary. You could consider asking a friend or relative to copy your numbers for you.
See "Getting Help Preparing Your Return" for ways to self-prepare a return using your computer, get additional forms, choose a paid preparer, or locate a volunteer to assist you.
When you prepare a return, keep the back-up documentation with your copy of the return â€" or at least note with your return where the back-up documentation is stored.
Avoid Problem Preparers
If you use a paid preparer, choose carefully. The IRS keeps an eye on certain preparers and may automatically call into question all returns some of them prepare. Be careful when choosing an accountant (see Selecting an Accountant) or tax preparer (see Getting Help Preparing Your Return).
Don't try to fudge your way through a return if you don't know what you are doing. Seek additional information, self-preparation tools, and professional assistance as needed. To learn more, see: "Getting Help Preparing Your Return."
Don't Use Round Numbers For Deductions
If you use round numbers for deductions (even when they're accurate) the IRS might think you're estimating things instead of actually adding up items based on your records. If one of your deductions comes out, say, to an even number, say $2000, you might consider changing that to an uneven number such as $1997.
Avoid Having a Lot of Income
Well, not really. But be aware that returns of higher-income taxpayers are more likely to be audited. If you report more than $100,000 in income, be extra-careful.
Get out of Dodge
Believe it or not, where you live affects your chance of being audited. For example, people in Nevada are audited four times more than those in Wisconsin. While we wouldn't recommend that you move just to lower your chances of being audited, you could choose the location that has a lower audit rate if you have flexibility in reporting your residence. If you are interested in this idea, ask your tax professional for a recommendation or visit your local IRS office's information reading room.
Avoid Common Errors
Double-check your numbers to make sure your calculations are correct. Compare this year's return to last year's to make sure they're consistent. If they're not, you might have made a mistake. Also, be sure to complete all questions on the return, even if you think they don't apply to you.
Avoid Large Refunds
In general, the larger your refund, the greater your chance of being audited will be.
- Consider increasing the amount of withholding or decreasing the amount of your estimated tax payments to even things out.
- If you use withholding as a means of "forced savings," consider having funds automatically withdrawn from your bank account every week and put into savings. You'll earn interest and reduce the chances of being audited. Why loan the IRS money interest-free anyway?
If You Get Paid in Cash
People who are paid in cash â€" such as hairdressers, waiters, and bartenders -- are often audited. If you regularly receive cash for your work, be sure to report all of the money you receive, including tips.
Large medical deductions in excess of the IRS' statistical norms can be questioned, even if they are justified. This doesn't mean you shouldn't claim every penny of qualifying medical expenses. Jjust be sure to have documentation to back them up.
It may also help to attach a diagnosis letter to your return. If your return is considered for an audit because of a large medical deduction, it might be passed over if the IRS worker sees proof of your illness.
Large charitable deductions can also be an audit trigger, but don't hesitate to claim everything you donate to a qualifying organization. Just be sure to have receipts (not just a canceled check) for any cash contribution of $250 or more or for any property that you donate. Consider attaching receipts for large donations to your return.
Watch-Out If You're Self-Employed
The IRS often targets people who are self-employed, especially if you report a net loss for your business or take a home-office deduction. Doctors, lawyers and accountants are also targeted because they generally run their own businesses and do their own bookkeeping.
The IRS looks closely at home office deductions.Don't apply too much of your home's square footage toward a home business. The space should look like an office and be used exclusively for business (not where your children do their homework or your spouse his/her personal business.)
If You File Schedule C
According to Consumer Reports Money Adviser, a rough rule of thumb is to avoid an audit by showing a profit on Schedule C in at least two years out of every five.
- For information about :
- Always keep a copy of original receipts for at lesat seven years. Credit card bills by themselves do not identify the item or service you purchased.
- Check out TurboTax.
- Several editions of the TurboTax program include what the company calls an "Audit Risk Meter" which alerts you to items on your return that could trigger an IRS. audit.
- TurboTax offers a free Audit Support Center which recommends how to respond to IRS letters. TurboTax's Audit Support Guarantee provides a tax professional to explain your audit letter and tells you what to do. The company's Audit Defense Plan provides a tax professional to handle audit negotiations to the highest level of appeals. In order to qualify for the plan, you must buy it before receiving an audit notice. To learn more, see: www.TurboTax.com