Trying to prevent a tax audit
By Justin Hunter
There are so many financial
nuances in the world that trying to create
a list of them would be exhausting to
write and I’m sure just as boring
to read. While your mortgage payment is
probably your largest financial obligation,
there is nothing more potentially stressful
than April 15, but it doesn’t have
to be.
For many people, tax day is stressful
for the simple fact that it is something
that lingers in the back of their mind
for several months and therefore is a
constant reminder that the government
is always watching you. But once you pay
your taxes, the process is done, forgot
about; until next year.
Unfortunately not everyone can simply
just do their taxes
and wait for another year to roll along
to break out the dusty calculator again.
Many people get audited; one of the most
dreadful words in the English language.
Diane Kennedy provides a few resourceful
tips that one can employ upon tax season
that can help prevent an audit, in her
October 11, 2006 article, “Five
Tax Mistakes that Could Cost You an Audit,”
which is posted in Realty Times.
“Now is the time to get your year-end
tax planning in order. This year, you
can make audit-proofing your return one
of your goals. The best way to do that
is to (1) have good documentation for
your deductions, (2) hire a good tax preparer
and (3) avoid the red flags that might
cause an audit!”
Every year millions of Americans
carelessly produce red flag all over their
tax return and thus receive an audit.
While an audit is the most dreaded thing
a tax payer can receiver, it is the IRS’s
best friend because it instills fear into
the taxpayer to remain thorough and honest.
“Interestingly enough, the IRS tells
us each year what they're going to be
looking for in their annual ‘Dirty
Dozen’ report. Plus, they make the
audit statistics available so it's possible
to see what they really did audit. Following
are the top five red flags for audits.”
The first red flag is out of your control;
location. It may sound unfair but that’s
the breaks. People living in North Central
(N.D., S.D. and Minn.), Manhattan, Brooklyn,
South Florida, Houston, the Southwest
(Ariz., Nev. and N.M.) and pretty much
all of California have a much greater
likelihood of getting audited.
Another fact that constitutes a red flag
on your tax return is determined by how
much money
you earn.
“It would seem to make sense that
the IRS is more likely to audit people
who make more money. But, the fact is
that they are actually more likely to
audit people who make LESS money. In fact,
the most likely return to be audited is
a return that includes a business that
makes less than $25,000 per year. If you
don't have a business, you have the most
chance for an audit if you file a Form
1040A and make less than $25,000 per year.”
Next are business
entities. Having sole ownership of a business
greatly increases your risk of being audited.
However, this is usually expected as most
private businesses hire tax consultants
to go through all their records to avoid
faulty returns.
The fourth red flag comes as a result
of under-reporting income. “The
IRS receives copies of your K-1s (from
Limited Partnerships and S Corporations),
1099s (from interest, dividends and sales)
and W-2s. If you don't report these items
on your return, or you report a different
amount, your return will get pulled for
inquiry.”
And the last thing to be cautious about
when filing for taxes is who actually
files it. If you have a complex tax return
and prepared it yourself or if your return
was prepared by someone on the IRS’s
negative preparer list, you are more likely
to be audited. To avoid this, you should
always have help when filing a complex
return and ask your preparer during your
interview process about his or her qualifications.
If they constantly complain about how
unfair the IRS is, that may be a clue
to choose a different preparer.
No one likes getting audited. This year
take a little more caution before filing
to better prevent this from happening.
