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How to Avoid an IRS Audit By David Francis
Experts dish on what triggers the tax man's curiosity --- and what to do if they come a-calling
But some people go too far in searching for tax advantages. Perhaps they take a deduction that they aren't eligible for, or claim a few extra dollars on a charitable donation. If the IRS begins to suspect that a tax return isn't entirely truthful, the filer might be in for an audit.
U.S. News recently spoke with two tax experts about how to avoid an audit, red flags that can prompt a second look from the IRS, and what to do if you're targeted by the IRS. According to these experts, while an audit is an unpleasant experience, taxpayers do have rights and can take steps to make the experience more palatable.
Who gets audited?
According to Michael Rozbruch, founder and CEO of Tax Resolution Services, few Americans are subject to a second look from the IRS. In fact, audits are one of the few times that having an average salary is an advantage.
"Only about 1.1 percent of people who file a 1040 [the most common tax return] for the 2010 tax year were audited ... [or] about 1.5 million," says Rozbruch. "However, the audit rate is 12.5 percent for people earning $1 million or more in 2010. This is up by 100 percent from 2009 levels! The IRS is aggressively going after this segment of the population."
What sets off an audit?
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She adds that the IRS is often curious about tax returns that don't appear to support the lifestyle of the person filing the return. "In such cases, the IRS will scour all of the taxpayer's bank accounts looking for unreported income," she says.
Lastly, simple errors in data input can catch the attention of an IRS inspector.
"In a recent audit case, for example, the taxpayer added a couple of extra digits to his state income tax withholding and reported a $600,000 deduction instead of $6,000. He had completed his return on the Web and never reviewed it before filing it," Reed says. "It's important to check every item on your tax return. In reporting income and withholding, a mistake in just one digit can lead to disastrous results."
What do you do if you get audited?
Both Reed and Rozbruch recommend contacting an expert if an audit is ordered.
"If the dollar amount of exposure is $20,000 or more, you should retain the services of a certified tax-resolution specialist, who is expert in defending their clients in an audit because they do this day-in, day-out, for a living," Rozbruch says.
Reed, however, believes a professional should be hired in all audit cases. "The advice we give to everyone is, 'Do not represent yourself in a tax audit,'" she says.
Are there certain types of write-offs that raise red flags with IRS agents?
Certain deductions raise alarms with the IRS, Reed says.
"For example, after widespread fraud was discovered, the IRS audited most taxpayers who claimed the First-Time Homebuyer Credit," Reed says. "The Earned Income Credit and the Adoption Credit are also common audit targets, but these are also credits that are often abused, so it makes sense for the IRS to verify that taxpayers qualify for them."
However, Reed adds that many Americans actually cheat themselves out of deductions because they fail to keep accurate records.
"Two common examples are receipts for contributions to charity and mileage logs. When taxpayers try to recreate these expenses, they discover it is hard to remember events that happened more than a year ago," Reed says. "In the absence of good records, the deductions are disallowed when audited."
If you're found during an audit to have made mistakes on your taxes, how do you square things with the IRS?
According to Rozbruch, the best track to take when an audit begins is to attempt to make things right immediately.
"If mistakes are found during the audit, you can come 'clean' at that time," he says. "If you are aren't going through an audit and want to correct a mistake, you can do so by filing an amended return by filing a 1040X within three years of the originally filed return."
Reed adds that if the taxpayer is not maliciously trying to cheat the government, the IRS can be lenient.
"In many cases, the IRS will abate penalties when a strong case can be made that the taxpayer made an innocent mistake," she says, adding that making things right "usually just involves paying the amount owed."
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Comment by clicking here. David Francis is a reporter based in Berlin and Washington, DC. He has reported from all over the world on a number of topics, from transatlantic relations, to sports, to border security, to local news, to finance.
© 2012, U.S.News & World Report LP All rights reserved. Distributed by Tribune Media Services
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