Nothing strikes more fear in the hearts of hardworking taxpayers than the thought of a tax audit. It’s essentially like going to the dentist, but instead of your mouth, it’s your entire financial existence that’s vulnerable. There’s no hiding from the tax man, and like the dentist, any cavities that they find in your record books is sure to cost you.
So what’s the good news? Well, chances are the Internal Revenue Service won’t be calling on you anytime soon. In 2009, less than one percent of those that made under $200,000 received a tax audit. Those that made more were audited at a rate nearly three-times that. If you made over $1 million, you might as well have walked around with a target on your back because over 6 percent of you were audited.
Still, like a lion in the Serengeti, you never want to provoke a predator. Your best bet is to go about unnoticed, pay your taxes and let the beast go about its business.
Here are a few things to help you avoid getting audited, and what to do if the worst case scenario does indeed happen to you.
Avoid IRS Red Flags
There are certain things the IRS looks for when deciding who to audit. Do your best to avoid these categories if you can help it:
- Checkered past: If you’ve run into the IRS before, chances are they haven’t forgotten about you. Your best bet is to make sure you’re in good standing with the IRS. Pay off all your tax debt.
- High-income earners: As mentioned above, the more you make, the more you stand out, though making less money to avoid an audit is kind of like cutting off your nose to spite your face.
- Self-employed/small-business owners: The chances are if you reported a large business loss for the year, the IRS will be paying attention. That’s especially true if you claimed a lot of business expenses as well.
- Home office deduction: If you’re going to file your home as a deduction, you’ll need to prove that you actually use it as an office for work. You need to prove that your home office is clearly distinguishable from the rest of your house.
- Large charitable donations: Talk about giving until it hurts. If the IRS notices a large charitable write-off, they’re going to make sure it’s legitimate. If you’re giving cash, make sure you keep the receipt. If you’re giving items, keep detailed records like appraisals, photos and letters from the organization you made the donation to.
- Bad math: It seems self-explanatory, but you’d be surprised how common this issue can be among most people. Make sure everything adds up. If the IRS notices a sudden drop in income, or unusually high deductions, they’re going to think something fishy is going on.
Keep Impeccable Tax Records
Just because you probably won’t get audited doesn’t mean you shouldn’t keep your books organized. It’s always a good idea to have a firm grasp of where you stand financially. By keeping your books in order–as best you can, of course–you don’t have to fear if an auditor comes calling.
These days, keeping your tax records organized is easier than ever. Instead of finding storage for binders upon binders of forms, receipts and so forth, you can keep them electronically on your computer’s hard drive. If you’re prepared then there’s no need to fear for what may or may not come. That’s peace of mind no tax refund can top.
Surviving Your Tax Audit
So you did everything you could, and you still got slapped with an audit. Sometimes these things are just unavoidable. However, that doesn’t mean you’re helpless. In fact, there are a lot of things you can do to improve your prospects of coming out unscathed.
- Taxation with representation: If you didn’t prepare your own taxes, the onus might be on your preparer to defend your filed return. If you did it yourself, you could look into hiring a certified public accountant or tax attorney to help represent you.
- Snail mail: The majority of audits are conducted through the mail. This is where keeping pristine record books comes in handy. Keep a record of any forms, receipts, etc. that you send to the IRS, and do it through certified mail for proof that you sent it.
- Take your time: It isn’t a good idea to rush through your audit. If you can’t get all your records together in the allotted 30 days, you can always file for an extension. It’s more important to be accurate than early.
- Mum’s the word: If you have to schedule a sit-down meeting with an auditor, never volunteer more information than what the IRS formally requested. If the meeting is at your place of business or home office, it’s a good idea to get everybody on the same page as well.
- Access your options: If the auditor finds you owe back taxes, or worse, that you must pay penalties, have them put it in writing. You can discuss any disagreements with the auditor’s supervisor. If not, you could always file for an appeal.
- Paying the piper: When all else fails and you have to pay, try negotiating with the IRS on the amount owed. You can also set up a plan to pay off the debt in installments.
Dealing with taxes is seldom a pleasant experience, but if you keep your books organize and avoid being greedy, you can actually alleviate a lot of stress and apprehension of facing the IRS.
Of course, that’s easier said than done. How do you organize your tax records? Better yet, who’s ever been audited?
