Before you can learn what to do to avoid being audited by the Internal Revenue Service (IRS), one must understand how a return is chosen for an audit. The IRS has a “secret formula” called the DIF score, and it is used to determine returns with the highest probability of generating additional audit revenue.
Most people now e-file their returns. If you do not e-file then an IRS agent has to enter your return into a computer. Once your return is entered the “secret formula” is used by the computer. What does it look for?
This computer program compares your return to others in your income bracket and weighs the differences between yours and others. The DIF formula considers not only your income and deductions, but where you live , the size of your family and your profession.
An example would be if your income was say $29,000 for the year; you probably would not have $10,000 in charitable contributions. If you did contribute and have your receipts, it is alright to deduct this. However, the DIF program will probably flag your return for an audit since the average in charitable contributions is $2400.
Now that you understand the process let’s see what we can do to avoid an audit:
1. The first rule in preparing your return is to be accurate with your calculations.
The IRS computers are programmed to correct simple mistakes in math and mistakes
in which your deductions exceed those limits set in the tax code. Very seldom is
a return audited for simple mathematical errors, but to many of them could show
that you were unprepared and therefore probably lack the required documentation.
2. Make sure your financial arrangement doesn’t stand out.
Self-employed: A self- employed individual as more of an opportunity to either
hide income or to create deductions. This being possible there is a greater
chance of being audited. Audit’s for self-employed individuals was up to 0.92% in
2005 and is expected to increase. This is why meticulous record keeping is
essential.
Those who are paid in cash: The IRS has specific audits programs for specific
professions and occupations. Because these individuals receive much of their
income in cash people who work as waiters, or doctors and some other professions
are prime targets for an audit.
3. Corroborate your deductions.
Be sure to keep records of any expenses you have incurred. There are some requirements for receipts such as meal and entertainment
receipts must have the following: amount, name and location of the servicing
facility, the person you treated, their business relationship with you, and the
business discussion related to this entertainment.
4. Know when to file.
If you have all your material ready and you are expecting a refund file early.
Leaving your money with the IRS is an interest free loan to the government. If
you owe taxes and do not owe any penalties then do not file your taxes until the
due date. If you are concerned about a possible audit then prepare your return
but do not file it until the last minute.
It is important to remember that the IRS can audit you for three years after you file your return although most audits occur within 18 months of the file date. This gives the IRS time to review and request your documentation before the statute of limitations runs out. This is normally three years but there are exceptions.
For assessment of taxes the statute of limitations is three years from the time you file your return.
Be sure, in case of an audit, that you keep a copy of your tax return in a safe place. You will also want to have all of your receipts for your deductions you claimed and any W-2s or 1099’s that you received. If audited you want to be able to have all the documentation used so you can verify with the IRS what they are looking at.