Financial Freedom

7 Ways to Minimize your chance of an IRS Tax Audit

I am sure we agree that anything related to Taxes are not your favorite topic.  However, there are ways to lessen your chances of having a problem with the IRS.  And there are steps you can take to increase your odds of avoiding a costly and stressful tax audit.

To be candid, there is no way of being sure that your federal tax return won’t be audited.  Even overpaying won’t protect you from IRS scrutiny.  Some returns are pulled out by random selection.

Others are chosen by IRS computers, which analyze returns to to score the likelihood of collecting further. Computers select a return for audit if medical expenses, contributions, property taxes, etc … represent an unusually high percentage of the taxpayer’s income (according to nationwide models.)

Returns also invite scrutiny when figures do not agree with other information received by the IRS, such as when a corporation reports on FORM 1099 that it paid $2,000 in dividends to a taxpayer, but that taxpayer reports only $1,000.

And returns may also be selected for audit because of tips received by “tax informants.”

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But your chances of being audited can be Greatly Reduced if you follow these 7 suggestions:

• Answer All questions on the tax return form
• Complete All schedules that are Required

Include Full Documentation of items that are likely to be questioned, such as large casualty losses, or large moving expenses.  If the IRS asks for supplied substantiation, expect this request to lead to additional questions on other areas of the return at the same time.

1. Send Tax Returns and other documents to the right office at the right time so that the correspondence and personal contact aren’t necessary.  Once begun, such correspondence or contact is often difficult to end- one thing leads to another.

2. Don’t deduct a type of item that had been disallowed on a previous tax return.  The IRS may remember this and look fo r a repeat.

3. Don’t use a tax preparer of a dubious character.  If the IRS, through its investigators, find a preparer who is grossly incompetent or worse, the name of all his/ her clients will be obtained.  All of them, however, innocent, will have their tax returns checked by experts.

4. Be certain that the return has the right signatures and identifying numbers.  If it is a corporate return, the title of the signer should be one of the officers authorized by law to sign.

Many Audits are triggered by…

Information returns from banks, investments, or employers that show payments (dividends, interest, salaries, or fees) that differ from those that were reported.

5. Unusually large deductions.  The computer flags deductions that are much larger than the average amount taken by most taxpayers in the same income group.

Suggestions:

Provide some details on extra large deductions.  Big casualty loss?  Describe the hurricane or flood, maybe even enclose a newspaper article.  Give dates and details of a long illness that produced large medical deductions.

6. Unbelievable numbers:

Examples:  Claiming that you held IBM stock for 25 years and sold it at a loss.  Business expenses that are out of line with the amount of gross income or the nature of the business … Mortgage interest and property tax deductions that are unusual for your area.

7. Large Round numbers raise questions as to whether you picked an exaggerated number out of the air without supporting documentation.

8. Home office:  This set-up usually receives closer scrutiny.

When are Taxes Due:

Every year since 1955, taxes have been due on April 15 … except for sometimes. Like the last two years. And this year.

Tax Day falls on April 17 for 2018.

That’s the deadline for filing your 2017 federal tax return, the last day to make a contribution to an individual retirement account for it to count against 2017 income, the deadline to file a tax extension, and the day when quarterly estimated tax payments are due for those who make them.

Make sure you are taking full advantage of all the tax savings available to you beyond a standard deduction:

Fund an IRA

Health Savings Accounts:  (Basically an IRA type vehicle to pay health-care related expenses)

-Must have a high deductible health plan

-Annual deductible above $1,300 ($2,600 for families)

Withdrawals:  Can be made tax-free to pay qualified medical bills.  Unused HSA money can be carried over to subsequent years to grow tax-deferred through investments in mutual funds, stocks, bonds, etc… – potentially for decades.  Money withdrawn before age 65 that is not used for health related expenses is subject to income tax and a 20% penalty.  After age 65, you pay only income tax.

Student-Loan Interest:  You can deduct up to $2,500 worth of interest paid on student loans, regardless of how many students there are in the family and whether the loan financed higher education for you, your spouse, and or dependent, provided your income is below a set amount.

Alimony:  Alimony is 100% deductible for the payer and is considered income for the recipient.

Nobody wants to have scrutiny and the stress of an IRS audit.  So, by being careful to avoid these 7 mistakes can lessen the probability of an audit.

*Legal Disclaimer: The Frugal Prof is not a certified accountant and the information provided should not be construed as accounting advice.  Please consult with your own tax preparer.