Three Things You Can Do to Avoid Being Audited
According to 2012 IRS statistics, audits are on the rise for higher-income filers. If your income is higher than $200,000, there is currently a one in 27 chance you will be audited. But what do these audits entail – and how can you avoid them?
Imagine this scenario. You make a significant donation to Save The Animals charity in 2013. After filing your return next April, you receive a letter in the mail from the IRS. You open it, dreading its contents, and find that the IRS disputes your charitable donation. They are demanding that you provide proof that you did actually donate that money.
This not uncommon scene is an example of a “correspondence audit,” meaning that notice of the audit is delivered in the mail. A letter from the IRS will arrive, announcing their intent to audit certain aspects of your return for a particular year or years. In the letter, they will ask you to support those aspects of your return with documentation, the nature of which depends on what portions of your return are under review.
This is also what’s known as a targeted audit. Contrary to popular conception, the IRS (or the state) typically is not looking at your overall return, but rather specific portions. Most often, they are interested in large or otherwise unusual deductions or losses. For instance, if you claimed a $5,000 deduction for contributions to charity as in the example above, the IRS would specifically ask you to justify that deduction by producing something to back it up, be that a copy of the check you paid, your bank statement or a letter from the charity acknowledging your donation. Other commonly targeted deductions include mortgage interest, state income tax and personal property tax deductions, in addition to net operating losses from a business.
If you can satisfy the IRS’s demands, the audit will stop there. If the IRS disagrees with you or you can’t back up the portion of your return they are interested in, you enter into an appeals process. And if the appeals process fails to produce an agreement, you get caught up in litigation. The whole process from start to finish can take years to conclude.
To avoid getting caught up in a complicated audit, there are three things that you can do.
Keep good records. If you are keeping track of your purchases and donations, you can easily produce those records upon request. Should you receive a letter in the mail, you will be able to respond quickly and close the matter faster, without having to enter into the time-consuming appeals process. Bear in mind, too, that it’s not your accountant’s job to keep track of your records. You need to be tracking your expenses and saving your mail.
Choose a good tax advisor. Tax law is complex and ever-changing. Make sure that you’ve got someone on your side who understands those laws and can help guide you through it. Don’t assume that you understand tax law. At a CPA firm like ours, oftentimes three or more people look at the return to make sure that no mistakes are made. You also want to ensure that you have an advisor who understands the whole audit process from beginning to end. They will know what might set off IRS flags and will make sure your deductions are calculated correctly.
Use common sense. Review your return yourself and check to make sure that the numbers make sense to you. Chances are that if something doesn’t look right, it probably isn’t. Be aware of what you’re filing.
If you follow these guidelines, the chances that the IRS will ask to audit you are slim. Even if they do, you will be prepared with all your records and documentation, ready to mail in whatever is required and sidestepping entirely the complicated mess of litigation.
Are you worried that you might be audited? Have you already experienced an audit and are looking for ways to avoid it in the future? Contact Alex Knight, partner, at [email protected] or 404-898-7428.