Having just finished a first pass through our taxes, my thoughts have naturally turned to our audit risks. We haven’t done anything sketchy, and I also know that the odds of getting audited are quite low, but still… I really don’t relish the idea of having to fight an audit.
To that end, I thought I’d highlight some suggestions that I ran across in an article on MSN. If you’re interested in this topic, you should also check out my earlier article on red flags that might trigger an audit.
Rule 1: Check your arithmetic. While IRS computers are set up to automatically correct mathematical errors, having too many errors could indicate a sloppy return, which could trigger an audit. I’m not particularly concerned about this one, as we use TurboTax and there’s not really much room for errors.
Rule 2: Arrange your finances so they don’t stand out. If you’re self-employed, be very careful when claiming business deductions for what might be construed as personal expenses, and be prepared to back up your claims. Also keep in mind that individuals that receive a substantial portion of their income in cash are more likely to be audited, as the IRS is more likely to find additional tax dollars by reviewing their returns. Honestly, there’s not a lot you can do here other than not cheating.
Rule 3: Substantiate. Substantiate. Substantiate. During an audit, the IRS will typically focus on areas where taxpayers typically fail to keep the required substantiation, including automotive expenses, travel, meals, and entertainment. The rules here are simple. If you want to deduct mileage for business, you need to keep a mileage log. If you want to deduct meals or entertainment, a receipt is required for expenditures over $75. Regardless of the amount, you must record the amount paid, the name and location of the restaurant, the person you entertained, that person’s business relationship with you, and the business discussion related to the entertainment. If you don’t talk business, it’s not allowed.
Rule 4: Know when to file. While it’s always good to file your return early if you’re expecting a big refund, you should always wait to file at the last minute if you owe taxes — no sense in giving the IRS their money any earlier than necessary. Moreover, waiting to file at the last minute is decreases your chances of being selected for an audit. You might even consider paying any taxes due by April 15th, but filing an extension such that you can wait to submit your tax return until October. Perhaps it’s overly paranoid, but we did this last year.
Rule 5: Plan your taxes to preempt an audit. If you have any odd, tax-related expenditures, don’t be afraid to attach proof to your tax return. For example, in the case of an especially large medical bill or a particularly generous charitable donation, attach a copy of the bill or check. While the IRS computers will still kick out your return, there’s a chance that a real, live person will decide against an audit when they review your return.