REDUCE YOUR CHANCES OF BEING AUDITED
REDUCE YOUR CHANCES OF BEING AUDITED
Many Taxpayers are increasingly being audited now days, and as such I have considered it helpful to put down steps for one to reduce the chances of being audited or red flagged for audit. However first mention briefly Audit and Appeal process:
A. Tax return selection process:
a. DIF: This is Discrimination Function System – where some of tax returns are isolated.
b. TCMP: This Taxpayer Compliance Measurement Program. Returns are determined if they have complied with professional and ethical standards of IRS.
c. Document Perfection and information-Matching Program in terms of :
i. Mathematical accuracy
ii. W-2s and 1099s matching
B. Types of Examinations:
a. Correspondence: Here one would receive mail from IRS requesting either information or clarifications. You have to respond within the stipulated period given.
b. Office informal audit: This forms requires one to meet an IRS agent at an IRS office to clear or verify some tax issues or inconsistencies in the return one filed. You to call the officer assigned for case and set a date of convenience for both of you, within the allocated time frame
c. Field – in this case, an IRS agent visits your office for onsite assessment and this point, it is advisable for a taxpayer to have a representation.
C. Settlement Procedures:
a. Revenue Agent’s Report and Form 870
b. 30 days letter to appeal
D. Administrative Appeals:
a. 90 day letter is statutory notice of deficiency
b. Taxpayers who are not interested in going to court can simply wait for 90 days to the deficiency formally assessed and then any additional amount due.
c. Taxpayer who does not want to pay first must file a petition with U.S Tax Court within 90 days of the date of the letter.
d. The decision to take an unresolved tax issue to court involves number of additional factors and should typically be made only with of a legal counsel specializing in tax litigation.
Now let us see steps you could take to avoid or at least minimize chances of your return being selected for assessment and eventual auditing.
Number 1: Don't make mistakes on your return. Double check the math and write legibly.
Number 2: Don't overdo your charity deductions. You may feel generous, but Uncle Sam has a formula for what it typically sees, and anything above that is a red flag.
Number 3: Know the rules for a home office. For example, the part of your home for business must be used exclusively for business. Dining rooms don't count.
Number 4: Make sure your W/2 matches your return. People who rely on tips and cash are red flags to the IRS. Remember that all your income gets reported to the IRS. All your Ws, your 1099s, and 1098s- everything from interest to what your personal wage is."
Tip number 5: Explain large changes in income in advance to the IRS. With so many people getting laid off and then getting jobs at different pay scales, it doesn't hurt to attach an explanation to your return. If you changed job due to bad economy, attach it to the return and send it in.
Tip number 6: Beware of turning a hobby into a business expense. Teaching golf swings on the side could end up getting you audited if you try to deduct related expenses.
Number 7: If you are putting in for the first time home buyer credit, make sure you actually qualify for it and then back it up with the proper documents.
In the end, if you still get audited, don't panic.
A recent CNN poll found 78% of all audits are handled through the mail, with the IRS simply wanting a written clarification on something it found in your return. Still remember that only 1% of the total annual returns are usually audited. However, keeping supporting documents is a key to a free panic exercise.
Michael M Kisembo UDBS, BA, MTS, MBA, DBA