Updated: 10/27/2010 9:00 AM ET|
6 audit red flags
It may not be due to something you did wrong. It may even be triggered by an IRS error. But there are ways to reduce the chances of getting that dreaded letter.
There's no sure way to avoid a tax audit. Well, actually, there may be, but I don't recommend it.
I know a preparer who suggests avoiding an audit by underpaying income tax by $10. While those dollars are outstanding, the return goes to collections, which minimizes, according to him, the opportunity for the audit division to focus on your return. He considers the penalties and interest on the $10 owed to be minimal insurance to shrink your exposure.
Most audited tax returns are selected for review either because the filer is part of a target group or because a computer program selects the return. The computer system selects many returns randomly, but there are red flags that will draw the Internal Revenue Service's attention.
The key is to minimize your exposure. Here are some things you should try to avoid:
1. Math mistakes
The biggest reason people receive letters from the IRS is addition or subtraction goofs. Fortunately, math errors rarely lead to a full audit. Still, double-check your math before you send in your return.
And if you receive a letter from the IRS saying you owe money, check your numbers first. Sometimes, an IRS employee misreads one of your numbers, or the number is keyed into the IRS computer system incorrectly. If the agency is wrong, send a letter with a printout of your calculations.
2. Mismatched interest and dividend reporting
If the amounts reported in supporting documents don't match the amounts on your return, you will get a letter.
There are lots of possible errors here. Sometimes, the IRS will enter Form 1099 information (investment, interest and other nonwage income) into its computers and erroneously key in the income amount or the Social Security number of the recipient. If the income isn't yours, get a letter from the bank or other payer and forward that letter to the IRS. If the amount is incorrect, send a copy of the Form 1099 mailed to you by the payer.
3. You're on the IRS hit list
Those who receive much of their income in cash are traditionally on the radar screen of IRS agents looking for unreported income. Be prepared to defend any non-income deposits into your accounts. Recently, the agency has also pinpointed small-business owners and the self-employed. Too many "business" cars were going to campus each September. Be prepared to substantiate your deductions.
4. You have a big mouth
Never brag about how you put one over on the IRS, especially on Facebook. The IRS has been successfully trolling such sites to find unreported income and tax cheats.
Internal Revenue Service whistle-blowers can earn rewards of 15% to 30% of the additional tax collected, including fines, penalties and interest. Scofflaws can be reported by filing Form 211 (.pdf file) or calling the IRS fraud hotline at 1-800-829-0433.
Everyone else: Zip it. Keep your accounting strategies to yourself.
5. You're exceptional
An IRS computer program compares your deductions with others in your income bracket and weighs the differences. This secret IRS formula, called the DIF Score, is used to select returns with the highest probability of generating additional revenue through audits.
Check programs like TurboTax's deduction finder and books like my "How to Pay Zero Taxes" to ensure you're getting all the savings you deserve.
6. You have the wrong preparer
Let's face it: Some tax preparers are less than professional. Some, unfortunately, are crooks. If your preparer promises you a refund before checking all of your paperwork, run as fast as you can. That preparer is going to be taking illegal or inflated deductions, and, when the IRS finds out, you're going to be the one who pays the bill, plus interest and penalties.
On the other hand, you may qualify for a reward if you report your criminal preparer to the IRS fraud hotline.
Make sure you're withholding the right amount using a program like TurboTax's paycheck analyzer, or check Circular E from the IRS. You can download a copy from the agency's website.
If the IRS is coming . . .
If you are facing an audit, don't panic. An audit is merely a process in which the IRS asks you to substantiate the numbers on your tax return.
Here are three survival strategies:
Call your tax professional. Or get one. If the audit is simple -- to prove your charitable and interest deductions, for example -- you can do it yourself by mailing the IRS copies of your substantiation. For all in-person audits, I strongly suggest professional representation.
Plan your taxes to pre-empt an audit. If, say, you have a huge medical deduction that you feel would increase your chances of being audited, attach copies of your medical bills to your return. The IRS computer might still kick out your return, but when a real person looks at it, the reviewer will recognize that you know the rules. This may reduce your odds of a full audit.
Keep records for three years. Normally, the IRS can audit you for three years after you file your return. In reality, however, most returns are audited within 18 months. This gives the IRS time to do the review and request the appropriate substantiation before the statute of limitations (usually the three-year period) ends.
The IRS has announced that it will not audit a taxpayer for more than five years in a row on the same issues. Personally, that doesn't give me much comfort. Once the deadline has passed, the IRS normally cannot audit your return, and your expenses are insulated from examination.
File at the last minute if you are concerned about a potential audit. It won't hurt and might decrease your chances of being selected.
The good news: If you are audited one year with a refund or no change, it decreases your odds of being audited in subsequent years. In fact, if you are audited on the same items two years in a row with no additional taxes due, the IRS manual specifically recommends not auditing you on the same items for a third year.
Jeff Schnepper is the author of the best-selling book "How to Pay Zero Taxes," which is in its 30th edition. He is a former professor of taxation, accounting and finance. Schnepper now has a full-time tax planning and legal practice in Cherry Hill, N.J. Click here to find Schnepper's most recent articles.
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Whats really funny is someone calling out Turbo Tax ads on an article and then does a commercial for H&R Block in their comments. Hmmm maybe an employee of H&R Block? Can you say Hypocrite?
A flat tax would be simpler for most citizens and should eliminate the IRS which would be a huge savings for everyone.
(1) Enter the country illegally.
(2) Purchase false documents (birth certificate, SSN).
(3) Either get paid under the table or use your new identity to fraudulently file, while you send all your earnings out of the country.
If you are audited, just repeat step (2).
If we had a flat rate tax that EVERYONE pays there would be no tax cheats, and we would have a BALANCED BUDGET.
Everyonr would get more in their paycheck and pay less tax, there would be no cheating and we could get rid of the nation debt.
Even a 3year old can figure this out.
Here is some advice from an actual accountant (graduated 2 years ago and recently passed the CPA exam). Most of us can file our taxes on our own without H & R Block. If all you’re doing is 1 or 2 W-2’s and taking the standard deduction, it’s extremely simple. If however you own a business, have investment income, dividends, or itemize your deductions, etc.. you should really seek out a tax accountant. Taxes can be extremely complex and they change consistently, I know CPA’s are required to do at least 40 hrs of CPE yearly, but I don’t think H & R block is under the same requirement. Most of the employees are seasonal “professionals” all they are taught is how to fill in the data screens at the company, but lack a fundamental understanding of the tax code. Therefore, they don’t know enough about taxation to know how to solicit information from their clients to really do a full service to them. Simply put, they learn nothing about taxation, only how to prepare the forms. Yes you'll pay more for the service, but should you get audited you'll know where the extra money went.
@ Knasser_51 did some research how about Wesley snipes what happened there.
PEOPLE DONT LISTEN TO KNASSER THAT IS HORRIBLE ADVICE AND WILL GET YOU INTO SERIOUS TROUBLE. MR. SNIPES GOT 3 YEARS IN JAIL 10MIL IN FINES. HE WAS FACING UP TO 40 YEARS IN PRISON. We all know celebs get off lite so think if you were in this position the only thing KNASSER says that makes sense is do the reserch you will prove him completly wrong
the only way to fix these problems is to shut down the federal reserve and take the power away from the central banks and wallstreet.
our government should print its own NON-DEBT BASED CURRENCY
many of our founding fathers knew very well the evils of the central banks and the power they held over our government.as a matter of fact lincoln said this
"The government should create,issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers.
The privilige of creating and issueing money is not only the supreme prerogative of government,but it is the governments greatest creative opportunity.
By the adoption of these principles the taxpayers will be saved immense sums of interest...Money will cease to be master and become the servant of humanity". ---Abraham Lincoln---
he then created "greenbacks"---a non debt based currency created by the government with no interest to the government or the people
a few days after he made this speech an article in the london times was put out by the central bankers about lincolns plans
and it read:
If this mischievious financial policy,which has its orgins in north america,shall become endurated down to a fixture,then that government will furnish their own money without cost.
It will pay off debts and be without debt. It will have all the money necessary to carry on its commerce.
It will become prosperous without precedent in the history of the world,,The brains and wealth of all countries will go to north america.
that country must be destroyed or it will destroy every monarchy on the globe".
a few weeks after this was placed lincoln was shot and killed by john booth.
booth was later found with papers that tied him to the central bankers.
another said this: "We have in this country one of the most corrupt instutitions the world has ever known.
I refer to the federal reserve board.
This evil instution has impoverished the people of the united states and has practically bankrupted our government...it has done this through the corrupt practices of the moneyed vultures who control it---Rep. Louis McFadden(R-PA)--
and another: "The financial system has been turned over to the federal reserve board.
That board administers the finance system by authority of a purley profiteering group,,,The system is private,conducted for the sole purpose of obtaining the greatest possible profits from the use of other peoples money".REP.Charles lindburg(R-MN)
History records that the money changers have used every form of ABUSE,INTRIGUE,DECEIT AND VIOLENT means possible to maintain their control over governments by controling money and its issuance---James madison--
they knew the true agenda behind the central banks and fought to keep it out of this country.
as long as the federal reserve and the central banks hold the power over this country we will never be out of debt and this country will never be free.
untill we do something about the federal reserve and the central banks all of this talk about the budget and taxes means absoultly nothing.
H & R and Liberty Tax are way too expensive!! My boyfriend went to Liberty Tax two years ago and end up paying $500-something for their services and they didn't know what they were doing when it came down to a railroad employee. Meanwhile, we went to somebody who recommened us (a small business tax preparer), and she charged $100 for her services, and he got much more money back than Liberty Tax.
From legallad.quickanddirtytips.com/mess-taxes.asp x
Is the Income Tax Unconstitutional?
For example, some people argue that the Internal Revenue Code is unconstitutional because of Article One’s requirement that “direct taxes” be apportioned among the states on the basis of population, rather than on the basis of individual income. The only tiny flaw in this argument is that the Sixteenth Amendment to the Constitution, ratified in 1913, specifically grants Congress the power to tax individual incomes without any apportionment. Over the years countless tax protestors have tried to persuade federal judges that the Sixteenth Amendment was not properly ratified, but such arguments are routinely tossed out of court.
What About the Old Unlawful Money Argument?
Another perennial loser is the argument that the tax code doesn’t apply because the prevailing form of currency in the US – Federal Reserve Notes – is not lawful money. In 1980, for example, a Kansas man named Gary Rickman declared that he had no taxable income whatsoever, despite the fact that he had admittedly been employed as a mathematics instructor at a community college. At his trial, Rickman explained that his income was zero “dollars,” because all he had earned were measly Federal Reserve Notes. For the purposes of tax law, Rickman contended, one’s earnings must be either gold or silver coin as supposedly required by the Constitution.
Rickman bolstered his argument by pointing out that the Form 1040 uses the dollar sign ($) which, as everyone knows, is a symbol that refers exclusively to coins, not notes. The idea, it seems, is that the dollar sign comes from the old Spanish Dollar, or piece of eight, which was a silver coin at the time that the “dollar” was adopted as the unit of American currency. The federal court of appeals referred to this theory as “the height of absurdity” and upheld his conviction for tax evasion.
the biggest problem i have with the whole tax thing is that it is simple extortion.
as there is NO law that says that the average working american has to pay income tax in the first place.
not to mention the income tax amendment was NEVER properly radifide by all the states.so that was all done illegally to begin with.
but what gets me the most is how little people actually know about what our income taxes go for once they are collected,,it seems that most people have no idea.
100% of all federal income taxes collected go to pay the intrest on the loans that our government have taken out from the federal reserve.
With all those degrees I would think you would be able to get a better job than HR BLOCK.
No wonder they can' t figures taxes correctly there ; too man egos who don't make mistakes.
Should have known when we got one of those arrogant idiots that we didn't owe the IRS.
We took it somewhere else and low and behold we were due a refund. Had to get our lawyer to write HR Block a letter getting our $200.00 fee returned for inaccurate tax preparation.
Flat tax would solve a whole lot of problems and mistakes.
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