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Avoiding an IRS Audit

Mar 19, 2008
The percentage of tax returns that gets audited is steadily increasing. The figure for 2005 was 0.92%, up from 0.77% in 2004 and 0.65% in 2003. An audit is one meeting you definitely want to be able to miss. How do you do that? To avoid an IRS audit, caution and preparation are essential.

1. Submit a mathematically correct tax return. The first key to avoiding an audit seems like it should be obvious, but since up to 12% of people report thinking it's OK to cheat on taxes, it bears repeating. The IRS computers check and correct the math you submit, but too many errors indicate a carelessly completed return that may yield more income for the government. This leads to the very careful checking of the return: the audit.

2. Give proper proof. As your return is assessed, it is compared to the other taxpayers in similar income and tax brackets as you. You can avoid an audit if you document any unusual activity. One example is any unusually large charitable contributions-attach a copy of the check to your return. The same thing is true for any very large medical deductions; attaching the bill to your return will help you avoid an IRS audit. The computer may mark your return as needing further review, but when a person sees it, they will allow for the proof attached. This extra step can help you avoid an audit.

3. Sidestep the dangers of self-employed status. If you are self-employed you naturally increase your chances of being audited. The IRS is concerned in this case that you will not properly declare income or will apply deductions too generously. One legal way to avoid this suspicion is to form an LLC (limited liability corporation) or to incorporate. LLCs are audited with much less frequency than individuals. For information on how to form an LLC and other benefits and risks, contact your lawyer or tax professional.

4. File at the right time. Always file on time. If you are receiving a refund, you can file it early and get the money even before the deadline. On the other hand, if you owe money, you don't have to pay it early; that's just an interest-free loan to the government. One suggestion is that if you file for an extension, you'll have until October 15 to file the return. By that time, the IRS is likely to have spent all the money they have budgeted for audits, which might lessen your chances of being audited. Waiting until the last minute without an extension can have the directly opposite effect and draw attention to your return. Even if you do use an extension, make sure that you follow all the rules and keep all the deadlines. You merely want to increase your chances of avoiding an audit, not incur penalties and other liabilities.

The idea of an audit can be scary. No one wants to have to try to justify his or her return to the IRS. Worst of all, no one wants to end up with an unmanageable tax bill to pay. These are a few ideas that you can use to keep yourself out of tax trouble and avoid an audit.
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