At the start of my tax career, I was like most people: terrified of an IRS audit. But due to the nature of my clients’ activities in real estate partnerships, I had to face audits head-on. (For example, there was the time a client bought a three-building apartment complex in Canada and one of the buildings burned down about two weeks later. That client’s return was audited immediately.)
After years of experience, I can tell you with certainty that no one looks forward to an audit. Fortunately, there are a few things you can do to help prevent the IRS from auditing you in the first place:
1. Don’t make mistakes. Be sure you’ve accurately entered all of your W-2s and 1099s, and verify all Social Security numbers—especially for new family members, such as new dependents or a new spouse. If you’ve recently changed your name, only file using your new name if it has been updated in the Social Security database.
Review your tax return carefully. Did you enter any estimated amounts while you were trying to see what you owe? Be sure to remove them. Are all expense entries on the correct line? Be sure to double check. Most importantly, do you understand every entry on your tax return? If your tax pro enters an amount and you don’t understand where it comes from, ask.
2. Explain unclear items. When you have something unusual on your tax return, file the return on paper and include explanations about any unusual or unclear items. For instance, if you had to estimate the original purchase price of something because you lost some documents, explain how you arrived at your amount. If you are being assessed cancellation of debt income but the debt was not yours, explain why it’s being assessed to you. If you are claiming your child but your ex filed first, explain why you are the correct parent to claim the child. Get the picture? An explanation could be enough to help prevent the IRS from auditing you.
3. Document, document, document. Keep good records of all purchases and sales that you include on your tax return. Keep logs of business, volunteer, medical, and moving mileage. Record the dates, locations, and lodging information for business and medical travel. Having all the documents means you and your tax pro can figure out how to maximize your tax breaks (and explain things to the IRS if need be).
4. Don’t do anything illegal. Need I say more? Illegal activity can get you in trouble with the IRS as well as other authorities. Click here to read how the IRS Criminal Investigation Division operates.
5. Don’t make your friends, lovers, employees, co-workers, or neighbors angry. I can’t tell you how many audits have been initiated by unhappy ex-spouses or lovers looking for revenge; jealous neighbors eyeing the boats, jet skis, and bling next door; or disgruntled employees who know all about their former boss’s under-the-table operations. Beware—even if you’re not doing anything wrong, someone who doesn’t like you could get you audited if they try.
Overall, not getting audited is simply about common sense. If you do get audited, though, consider enlisting the help of a tax pro who can help you through the process.
Eva Rosenberg, EA is the publisher of TaxMama.com ®, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.