Navigating tax season: How to avoid an audit
The Liberty tax preparers are dancing on the street corners. The IRS is expecting a 1040 (and perhaps a check) from you. April 15 will come as surely as it snows in Indiana in January and February and March. Just as the TV stations warn you of impending storms, this article discusses ways to avoid an audit.
The good news is that less than 1 percent of our income tax returns are audited. That figure is probably greater than the odds of getting a speeding ticket. Yet most of us do get stopped by Officer Friendly. Let’s lower the audit odds.
Check your math. Invest in a calculator. Math errors are a significant reason for audits. Likely the auditor thinks that one math error may indicate other errors that can increase your tax bill.
Sign your return. Many taxpayers simply forget to sign the return (joint returns need to be signed by both spouses). If the return is unsigned, the IRS may wonder if your “forgot” to include income you received during the year.
Don’t under report income. The IRS gets those 1099s you received for dividends and interest. There is no threshold amount before you have to report the income; $10 still counts. Cash payments may be hard to trace back to a taxpayer, but it can be done, particularly if the payment to you is a business deduction for someone else. The IRS is not amused when the taxpayer plays “hide and seek” with income, and when caught, substantial penalties and interest are sure to follow.
File your return and pay the tax on time. A late return probably guarantees an audit. If you cannot compute your tax by April 15, file for an extension and pay what you believe is your tax. The extension is only for filing and is not an extension for payment. By the way, the IRS does notice when you stop filing. Death is not even an excuse because your executor may need to file your last return for the year of death.
Don’t overvalue charitable donations. Former President Clinton, while governor, listed items of underwear he donated at 25 cents each. Clothing doesn’t have much resale value. Most of our personal items probably should be valued at garage sale prices, and certainly not at replacement value. Most charities will give you a receipt for the donated items, but will not place a value on the gifts.
Don’t deduct what isn’t deductible. You may make a political contribution to your favorite candidate and want to deduct the contribution. You can’t. Loans to friends may turn bad and uncollectible. The IRS will insist that you show that the debt existed, such as a promissory note, and what you did to collect, such as suing the debtor. Forget about taking a deduction for the bad loan to your child, because the IRS will reject that claim every time.
Don’t estimate your deductions. Keep accurate records. The burden of proving each deductible amount is on the taxpayer. If you have deductible business mileage or charitable mileage, keep a log and record every mile and every toll paid. If you have a business, record each expense and its purpose. If you pay for child care so that you can work, get a receipt. Keep track of your unreimbursed medical expenses.
We sign our tax return “under penalties of perjury”, which should be a sobering reminder that the 1040 is, as attested by our signature, correct and complete.
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