How to Avoid a Tax Audit
Beware of Disgruntled Employees, Ex Spouses & Nosy Neighbors
The IRS has been getting a lot of press about their whistle-blower program for good reason. It works big time. Informants are paid a minimum of 15% and a maximum of 30% of the amount owed by businesses or individuals, up to a $2 million threshold. Bill Raabe, a tax expert at Ohio State University is quoted as saying, “You’ll even have disgruntled spouses or ex-spouses, as well as ex-employees turning in their former employers.”
Some will even turn in the current employer. To them, revenge is oh so sweet. A reward from the IRS can be seen by current employees as a great severance package. The IRS Reward program will get a lot of additional publicity this year according to an insider who wished to remain private.
In 2008 alone, the IRS received 476 tips identifying 1,246 questionable taxpayers, according to the article. “Many claims are for substantially more than the $2 million threshold and involve business or wealthy individuals,” according to IRS Whistleblower Office director Stephen Whitlock.
So what is your best strategy? To start with, quit bragging about your schemes to avoid taxes. It ticks off lower income people who can’t take advantage to tax breaks designed in for upper income business owners. Keep your taxes legitimate and then be sure to keep your tax information private.
In some cases, this may mean keeping it private from spouses as well. They may not understand the legitimate tax strategies you and your tax professional are legally using and could very well distort or misinterpret the information. With taxes, discretion is the better part of valor. Complain don’t brag. Taxes are excessive to begin with due entirely to government overspending and over regulating.
In general, you probably want to avoid deducting anything out of the ordinary, like claiming use of your entire house as a home office. Another stupid deduction is writing off pet expenses. They are not legitimate guard services. Also they are not dependents either. Sure, they may feel like family, pets are not legal dependents. Each dependent must have a valid Social Security Number.
Another way to avoid an audit is ensuring you don’t deduct the same expense on different forms. And if there is a deduction that you think may stand out, such as a large amount spent on building repairs, offer an explanation if possible. The best explanations are email attachments, which have gone back and forth with your attorney.
Please don’t say you can’t afford an attorney, according to Gwen Owens, an Arkansas PrePaid Legal Agent. Pre-Paid legal is only $15 to $30 per month for the entire family and most business plans are slightly above to well below a modest $100/ month. Now here is a legitimate write-off that pays off very well. Gwen Owens can be contacted on her mobile at 404-395-8483. She lives in Hot Springs, Arkansas.
Prove Your Deductions
In terms of paperwork and documentation, do you have a record of everything? On top of IRS forms and summary reports, you’ll need to substantiate deductions. This means receipts; copies of checks or other documentation that proves a deduction was a business expense. The IRS has learned all the tricks and scams tax cheats use so you won’t really fool them much anyway.
Use petty cash tickets all year long. For business expenses, the magic dollar amount is $75. If the expense is less than $75, a simple notation on a petty cash ticket will be enough substantiation. However, if the expense is higher than $75, a more detailed piece of evidence is needed, such as a receipt.
Here is a free petty cash template you can download for Microsoft Excel or Google Documents. You use the free petty cash template to log in your petty cash slips. Click here to see an example of a petty cash slip. You only needs receipts for amounts in excess of $75.00. Petty cash slips are easy to carry with you. Reconcile the tickets at least once a week if possible.
Do the Math Accurately Using Spreadsheets
Check your math and cross reference numbers. Does the amount of income on one form match the number on another form or a supporting document? While the IRS system corrects some minor mistakes, providing correct numbers and calculations is up to you and/or your accountant.
Plan Ahead For Tax Day
The IRS says it can audit you up to three years after filing your taxes, though most IRS audits are conducted within 18 months of filing taxes. A lot can happen in that time, so think about how you can plan ahead. This may include saving all expense receipts, logging the miles you drive for business expenses, or taking a photo of the space you claim as a home office.
This is called an extemporaneous log. You can do it all on a spreadsheet so it is simple and spreadsheet software like Microsoft Excel eliminate calculation time and assure accuracy. Extemporaneous logs are logs that are kept up to date as they occur. They are usually used by people who do a lot of business driving.
Here is an example of an extemporaneous mileage log.
|Extemporaneous Mileage Log Record|
|Date||Beginning Odometer Reading||Ending Odometer Reading||Miles for this trip||Rate Per Mile||Mileage Expense||Business purpose of this trip|
|1/4/2011||56230||56294||64||$0.51||$32.64||See buyer at Greer’s Ferry|
|1/4/2011||56294||56342||48||$0.51||$24.48||See prospect in Arkadelphia|
|1/4/2011||56342||56404||62||$0.51||$31.62||Meet with prospect’s attorney, Greg Sloan|
|1/5/2011||56422||56499||77||$0.51||$39.27||See seller at new prospective listing – Mrs. Robert Brown|
|1/5/2011||56499||56569||70||$0.51||$35.70||Meet with advertising rep with yellow pages|
|1/6/2011||56601||56622||21||$0.51||$10.71||Fill in purpose|
|1/7/2011||56629||56702||73||$0.51||$37.23||Fill in purpose|
|1/8/2011||56714||56777||63||$0.51||$32.13||Fill in purpose|
|1/8/2011||56777||56811||34||$0.51||$17.34||Fill in purpose|
|This Month’s Mileage Summary||512||$261.12||Note: You will see gaps in the mileage in some entries. This is to allow for personal use of the vehicle, which is not deductibel on this example. The person in this example is a real estate agent.|
If You Must Use Professionals
Lastly, consider the services of a tax professional. They know what they’re doing and can point out elements of your tax return that may get flagged for an audit. Plus, should you get audited you can look to them for help in putting together your case. Most audits are partial audits, where the revenue agent wants to see particular documentation. Just have it ready to go right away.
Now here is a bit of good news if you are selected for an audit, according to the IRS, this reduces your chances of being audited again the following year. The better you make it through an audit the less likely you will suffer more audits. Credibility matters at the IRS.
Here is a warning. Having a bad audit almost always guarantees future audits that cost ever more money to endure. The government is so short of cash, they are looking for an opportunity that may reap reward.
Please post your thoughts or experiences in the comment section below.
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