How to avoid an IRS audit?
Introduction
Some people think of a tax audit as any type of inquiry from the IRS, and they dread receiving any mail with the IRS's return address. Even more frightening is a letter requesting a meeting. Including all your income on your tax return, providing adequate documentation, and understanding tax law can help prevent your tax return from undergoing closer scrutiny.
Instructions:
Income Steps
Step One
Report all your income on the proper forms and on the proper lines on your tax return. For example, W-2 income belongs on Form 1040, line 7; income from residential or office rent goes on Schedule E; and 1099-MISC nonemployee compensation has to show up on a Schedule C.
Step Two
Obtain a corrected copy of a W-2 or 1099 from the issuer before filing your return if the original is inaccurate.
Step Three
Report all income that is attributed to your Social Security number. The IRS efficiently matches the informational returns it receives with what you have on your tax return.
Step Four
Assign income reported as yours to the correct person by issuing a 1099 to that person and sending a 1096 to the IRS. This often must be done with interest income earned in a joint savings account.
Step Five
Include on your tax return the tips and cash payments you have received for work or sales as well as the value of any services you barter. Underreporting your income just because there are no official documents can come back to haunt you.
Step Six
Declare hobby income on Form 1040, line 21 rather than trying to take your hobby expenses as a business loss.
Tips & Warnings
· When reporting interest income on Schedule B, list it exactly as it appears on your 1099-INT forms rather than lumping it all together under one heading. You may be asked to explain why you haven't reported it all when, in fact, you have.
· If you issue a 1099 to someone else as a "nominee," enter the income on your tax return and then subtract it, label it "nominee," and provide the person's name and Social Security number.
Deductions Steps
Step One
Keep detailed records, using IRS guidelines, to justify the deductions you take.
Step Two
Be careful not to deduct the same expense twice - for example, on a Schedule A and also on a Schedule C or Schedule E.
Step Three
Explain in some manner an unusually high deduction. For example, if your tenants trashed a rental home, list repair costs under "Other Expenses: Tenant Damage" rather than under the generic "Repairs."
Step Four
Provide a statement, calculations, and a clear but brief explanation of your rationale for extraordinary expenses. Label the statement with the form and line number to which it pertains, write "Stmt." next to the line number where you take the deduction, and staple the statement to the back of your return.
Step Five
Attach a photocopy of a document that will substantiate your claim. Proof of being legally blind is a standard, required document; a copy of a signed, formal contract to repay a loan may help when taking a bad-debt loss.
Step Six
Take a deduction for payments to an independent contractor only when you have issued a 1099 (or payment was less than $600).
Step Seven
Use whatever method is suitable for your profession and your personality to keep accurate, contemporaneous records of your business mileage.
Step Eight
Round off your deductions to the nearest dollar - not to the nearest tens or hundreds or thousands of dollars.
Tips & Warnings
· Tax agencies are striving toward paperless, electronically delivered and assessed tax returns. A tax return requiring both statements and documents, however, should be mailed or hand-delivered.
· Some audits are random, but most are the result of statistical comparisons. Even though large deductions can trigger an audit, the taxpayer has the right to take all legitimate deductions, and questions can be answered by providing adequate documentation.
Overall Tips & Warnings
· There is a difference between a mistake or misinterpretation and fraud.
