When I was a kid, I remember watching my dad prepare his income taxes. Like most red-blooded Americans, he hated the entire process. He'd stay up late combing through records and receipts, filling out the arcane worksheets and schedules, all the while grumbling incoherent epithets under his breath. It made quite an impression on my young brain.
Even more impressive to me was the time my friend's dad received a notice from the IRS that he was being audited. I had no idea what the word"audited" meant, but from the reaction it caused, I assumed it had something to do with thumbscrews and red-hot pokers.
If you share my deep-seated aversion to IRS audits, you will appreciate the following pointers on how to avoid an IRS audit from tax ninja Alan Olsen, the managing partner at Greenstein Rogoff Olsen & Co., also known as GROCO. GROCO is an excellent CPA firm in Fremont, California with an outstanding team of tax advisors. Here is Alan's list:
1. Be honest - Living by the simple rule of honesty will save a lot of stress. Report all income including; unreported interest, dividends or miscellaneous income. The IRS has record of all your 1099s, so be sure to report them. Omitting income will raise a red flag. Be sure to properly report all your expenses and deductions.
2. Be organized - Keeping good records is important. Properly record any expenses that will be deducted. Business expenses such as travel, meals, mileage etc. can be deducted, as long as they have been recorded. Keep all receipts, they will help to prove an accurate deduction. Be sure to give exact numbers versus rounding. When it’s time to submit your return, double check and make sure there is no missing information or signatures.
3. Be prepared if you are self-employed – The IRS realizes that self-employment also increases the likelihood of unreported income. You must have proof of all income and business expenses if you are self-employed. Do not record personal expenses as business deductions.
4. Watch your deductions - Taking deductions that are unreasonable for your income bracket may raise a red flag to the IRS. The IRS uses a computer to select returns to audit. This computer gives each tax return a score and your score is compared to others within your income bracket. High scores result from unrealistic deductions within certain tax brackets. High score returns are passed on to an IRS agent for review. Be sure you have proof to back up all deductions.
5. Avoid Fluctuation in Income – The IRS has a good idea of how much you make; if they notice a drastic change in your income this may raise another red flag. Be aware of reporting abnormally low income for your profession. On the flip side, be extra cautious if your income is over $100,000. IRS audits are 5 times more likely in this tax bracket.
6. Watch your Number of Charitable Contributions – Charity is important, but be aware that a red flag may arise if you made a lot of contributions. Hold on to all receipts, particularly if donating five times as much as the average person in your income bracket.
7. Use a Tax Professional – The best way to prevent or avoid an IRS audit is to use a CPA or accounting professional. These returns are often less likely to be selected for an IRS audit than a self-prepared return. A professional knows the laws and can help you to make sure that all proper deductions are taken and that all income is reported.