Tax Tips: How To Prepare For A Tax Irs Audit

The tips can help you prepare when the IRS notifies you of a tax audit of your claim.

Just because your tax return has been selected for an audit, does not mean the government suspects you of subversive behavior. Usually, returns to be audited are selected by computer, so don't think you are being singled out because of some IRS vendetta against you. The chances are that your return was either selected randomly, or for one of the following reasons:

Your business involves a partnership or shareholders.

You are self-employed.

You are a married person filing separately.

You have unexplained transfers of large sums of money.

Your income shows a shift up or down of twenty percent or more.

Your return shows an abnormally high number of deductions for the amount of income reported; especially deductions requiring detailed proof or explanations.

Your return lists complex investments or tax shelters.

You derive much of your income from cash, tips, or rentals.

Your return fails to report income other people have reported paying to you.

Your return contains a number of mathematical errors.

Someone has reported you for a violation.

You have had prior audits showing a tax deficiency.

You earn over 100,000 dollars a year.

Your return shows deductions for a home office. *

Although it is not always possible, avoiding an audit in the first place by making sure your tax returns are complete and accurate is the best place to start. Doing this is pretty simple for the average individual, even if a small business is involved.

Start by creating a file folder for each month of the year. Then, file every receipt, no matter how large or how small, in the folder for the month in which the transaction occurred. Include all bills, receipts, and correspondence from suppliers or customers. For donations or purchases that need to be explained, staple a brief note to the item before filing it. Another folder, labeled "Tax Info" will be useful for other items that might come in handy at tax time.

At least once a month, transfer the data for the preceding month to a permanent notebook or computer file so that a summary is available for printing out at any given time.

When you do file your return, always double-check the calculations to be sure you haven't made simple addition or subtraction mistakes that might place your return in the "to be audited" file.

If you list any questionable expenses or contributions, attach an explanation when

you send in the return. It is always better to spend a few extra minutes when actually filing your return, than to have it flagged for a lengthy audit, later, which may take even more of your time.

If, in spite of all your efforts, you still receive the dreaded notice that you are one of the "chosen ones" to face an audit, at least you will have the assurance that your records are in order, and that they will stand the scrutiny of even the most diligent IRS agent.

Check your tax return over several times the day before your audit, searching for any other areas you may need to explain to the auditor.

When the day of your audit appointment finally arrives, show up on time, armed with the following items to expedite a swift and satisfactory conclusion to your case. Be polite, but don't hesitate to ask questions if you don't understand something.

Bring your tax returns for the preceding 3 years, including the one currently under investigation.

Be prepared to justify items that might be questioned such as claimed deductions for expenses and contributions. Write these out beforehand, or be able to explain them satisfactorily. Take your folders with original receipts along in a small box and bring them out if requested.

Have a copy of your partnership agreement and bank records if they are applicable in your case. Also include the details of any investment or tax shelter programs you are involved in. Better to err on the side of bringing too much information than too little.

Having done all this, relax. Auditors seldom turn out to be the ogres the ordinary taxpayer imagines them to be. The chances are that your audit will end quickly and satisfactorily for both you and for the IRS.

If, after your audit is completed, you honestly think an unfair result has been rendered, you have a right to appeal that decision. The appeal procedure is detailed in IRS publication 1546. Don't hesitate to use the right to appeal if you feel sure it is justified in your case. After all, the IRS is made up of ordinary people who can certainly make their own share of mistakes. Perhaps the decision on your audit is one of them.

*Remember that deductions for a home office can only be claimed if the space is used strictly for business and is limited to fewer than 20 percent of your home. An appointment book, if your clients come to your home, is essential. The home address should be used rather than a P.O. box, and a separate line for business should be maintained.

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