A column on personal finance prepared by the Virginia Society of Certified Public Accountants
AVOIDING AN IRS AUDIT
January 22, 2004) – Although there’s no proven way to avoid an IRS audit, there are steps you can take to minimize your odds. According to the Virginia Society of CPAs, the best way is to carefully review your risk and to take special precautions with items that might trigger the attention of the IRS. Here are some preventive measures.
Supply Required Social Security Numbers
This includes yours, your spouse’s and your dependents’. If you’re claiming the dependent care credit, you’ll also need to include the Social Security or tax identification number of the care provider. Divorced taxpayers who pay alimony must provide the Social Security number of the ex-spouse to whom they make payments.
Check Your Math
If the IRS’s computer catches math mistakes on your return, it’s possible an IRS employee may take a second look at what you’ve filed. To avoid attracting unwanted attention, be sure to verify your math. If you use tax preparation software, you probably don’t need to worry, but it doesn’t hurt to double-check.
Report All W-2 and 1099 Income
Your employer reports to the IRS on Form W-2 the annual income you are paid. Freelance earnings are reported on Form 1099, as is income from banks, brokerage houses, mutual funds, and others who pay you income. The IRS computers automatically match income reported to the IRS with income shown on the taxpayer’s return. To avoid an audit, be sure those figures match. If your W-2 or Form 1099 is wrong, ask the issuer to file a correction.
A sloppy return may suggest to the IRS that your tax reporting practice may be careless as well.
Sign Your Return
Remember, if you file jointly, both spouses must sign and date the return. Failure to include all signatures means your return is incomplete in the eyes of the IRS.
Explain Large or Unusual Deductions
For taxpayers who have something unusual to report, a good strategy is to attach a statement to the return explaining the atypical item. For example, if you have a high amount of work-related expenses that are not reimbursed by your employer, an explanation may satisfy the IRS agent and avert a notification.
You should be aware, too, that the IRS establishes norms for such deductible items as charitable deductions and home mortgage interest, based on income ranges. For example, a taxpayer showing an income of $25,000 who claims to have put $5,000 in the church collection plate is likely to raise IRS suspicions.
Claim Business Expenses With Care
How you generate your income may increase your chances of being audited. Business expenses and home-office deductions, in particular, invite scrutiny. That’s because the IRS recognizes that if you are self-employed, you have more opportunities to claim personal expenses as business deductions. Take the deduction you deserve, but be sure you have the receipts and records to back them up.
Are you taking a deduction for expenses related to a home office? The home office deduction is one of the IRS’s favorite audit targets. If you have any questions concerning your eligibility, check with a CPA to see if you qualify.
Keep Accurate Records if You Are in a Cash Business
Occupations in which workers receive much of their income in cash, such as those in the food and entertainment industries, are often a target of IRS scrutiny. Generally speaking, the more cash you receive and the higher your income potential, the more likely the IRS will want to take a second look at your return.
CPAs say that sometimes, no matter how careful you are, you just can’t avoid being audited. Receipts and records that substantiate your deductions and the expenses you report can help you through the audit process.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
Lifetime Financial Planning, Inc.
Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
208 South King Street, Suite 201, Leesburg, Virginia, firstname.lastname@example.org
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