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How to Avoid an Audit of Your Taxes

How to Avoid an Audit of Your Taxes

Taxes are high enough; you don’t want to also pay penalties and interest because an audit reveals you’ve broken the rules. And Internal Revenue Service audits aren’t a vanishing anomaly; they’re on the upswing.

The IRS “has gotten almost nasty” in its pursuit of tax payments that could help reduce the federal deficit, says Sanford Botkin, a lawyer and CPA. Audit rates increased in 2007, both for overall individual rates and for higher-income taxpayers, reaching a 10-year high, according to IRS statistics.

Now that you’ve been forewarned, forearm yourself with these tips for reducing the chances that the IRS will send you an invitation you can’t refuse.

Choose Your Tax Advisors and Preparer Carefully

A highly qualified tax preparer will help you nip many common audit triggers in the bud. “You want an honest but aggressive accountant,” says Botkin, a former legal specialist with the IRS. That means interviewing preparers to determine if they will pursue all legitimate tax breaks without claiming questionable deductions that could raise red flags.

Watch Your Itemized Deductions

A tax return reporting a moderate $60,000 income while claiming a very large $15,000 mortgage interest deduction smells fishy. So the IRS uses computer algorithms to detect the smell of a tax return on which the key amounts relate to each other in statistically unlikely ways. That’s why it’s wise to include worksheets, disclosures, documentation or other explanations of large deductions and big changes from one tax year to the next with your return.

Small deductions that add up can also draw unwanted attention. “Look out for excessive miscellaneous itemized deductions like unreimbursed business expenses,” says Sandra Abalos, managing partner of accounting firm Abalos and Associates PC.

Learn About Tighter Rules for Charitable Gifts, Whether Cash or In-Kind

Keep giving, but be sure the recipients give you something back: Adequate documentation of the donation and its tax-deductible status. “Charitable contribution paper requirements are more intense this year,” says Kenn Tacchino, an adjunct professor of tax and financial planning at Widener University.

Bob Greisman, a partner with accounting firm BDO Seidman LLC in Chicago concurs. “Be careful not to take large charitable contribution deductions if you can’t back them up,” he says.

Keep a Lid on Your Tirades

If you really want to avoid an audit, don’t attach a statement to your return saying you’ve declared your half-acre home lot a sovereign nation not subject to US taxation.

Beware of Garbage In, Garbage Out

Neither a human preparer nor tax-preparation software like TurboTax or TaxCut can help you avoid an audit if you supply them with incorrect data. Because a highly qualified professional may be more likely to sense that your numbers are off, “the IRS is looking harder at returns prepared with consumer software,” Botkin says.

Play the Calendar

Some tax experts claim that you can cut your chances of an audit by strategically choosing when you file. The idea is to file on or within a few days before the tax deadline, usually April 15. From January to March, returns arrive at the IRS much more slowly, so the chance that any given return will be examined rises. But be sure your return is postmarked on time; late returns trigger audits.

Remember that Neatness, Accuracy and Completeness Count

Carelessness catches the auditors’ attention. “The number 1 audit trigger is that you didn’t include all forms or sign them,” Tacchino says.

Don’t let handwriting or an arithmetic error land you in the auditor’s hot seat. Hard-to-read returns will peeve the data-entry specialist, and math mistakes will be caught by the IRS computer and may raise a red flag.

Finally, accept that while you can significantly reduce your chances of audit, you might still receive that unwanted envelope requesting more information or summoning you to a sit-down with the feds.

A small fraction of returns -- probably less than 1 percent -- are randomly chosen for audit. “We’re seeing more of these now,” Abalos says. “In Phoenix, the IRS has trained a whole bunch of kids on audits, so we’re getting pure random training audits.”

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