A CPA firm should advise people that if they want to avoid being audited, that they should follow certain procedures. Anyone who follows these guidelines will be successful in not having their income tax return audited by the IRS. It’s that good. This article discusses the four things they must do, along with other do’s and don’ts to have the best level of audit protection available.
- file an extension to file your return
- obtain your wage and income transcript from the IRS
- include every number that is on the wage and income transcript separately on your tax return
- file your return a few days before the Oct.15th deadline
- document the return properly
- confuse the meaning of the extension or the dates to file
- forget to make sure the return makes sense
- forget to make your tax deposits timely
- go to a tax preparer just because they are convenient
- forget to make sure to you look at a tax organizer when assembling your tax information
File an extension form 4868 for form 1040, and other extension forms for other returns. You must file the correct form prior to April 15th of the year following the tax year. The extension will take you to Oct 15 of that year, adjusted if it falls on a weekend or holiday. This is an extension to file only. This way you avoid any late filing penalty. It is not an extension to pay any taxes owed.
Your wage and income transcript from the IRS is a list of the W-2’s, 1099’s, k-1’s 1098’s, etc. that has been filed for you. You must order this after the end of August when all of the documents have been reported. You can call the IRS and they will send it to you. There is no charge for this information.
Leave out any information that is not reportable, such as the balance in a retirement account. Make any adjustments to any of the numbers that are necessary, but make sure all is listed separately. Do not combine 1099 amounts or any other amounts.
The IRS selects most returns for audit from the returns filed prior to this deadline. By waiting till a few days before the deadline, you have lowered the chances of being audited considerably.
Unfortunately for most people, this level of documentation requires extensive knowledge of the IRS rules as well as experience defending positions in audits. The IRS often is not as willing to accept receipts along with your statements as support for items on your return. They want third party verification beyond the receipts. They want to know that your decision to incur certain expenses was prudent. They want to know how you paid for your living expenses if you report a small amount of taxable income. Basically, what we found out needs to be done, is to add statements to the return when you think any item may be questioned.
Statements such as “taxpayer understands the code sections concerning this deduction, and states that she is entitled to it, has all the verification to support it, that it was ordinary and necessary to incur it, etc. It is strongly suggested that you hire a CPA with audit experience to prepare your return if you expect to avoid an audit.
The extension is for filing your tax return, and not for making payments. If you own a 1120s corporation, the due date is March 15th, not April 15th. Make sure you know the correct due due for the type of returns you are filing.
Don’t try to take every possible deduction without explaining the situation and how you had money to live on. Make sure the numbers are on the correct forms and are totaled correctly. Do not blindly trust a tax package just because you cleared the alerts. Review the detail of the return as if you were the IRS looking at it trying to see how they can find ways to get more money from you.
Many people mistakenly think that since they are being paid as an employee and get a W-2 that they do not have to make estimated tax payments. What determines whether or not you have to make estimated tax payments is whether or not you will owe tax. Filing jointly, having another business, stock profits, etc. can cause you to be short on your tax deposits. You must be aware of how your activities affect your tax situation. You may have to make estimated tax deposits even if you are on a W-2.
People want money back fast, the largest refund, the lowest preparation cost, etc. The most important things to consider is avoiding an audit while not overpaying taxes. This is done by going to a professionally licensed law firm or CPA firm. These firms are licensed by the state and under strict ethics to provide quality service. If the firm is not licensed by the state as a professional Law or CPA firm you increase your chances of audit in many ways.
The tax laws can get confusing. They change often. There are a lot of recent changes. Organizers will ask you several questions about your income and expense situations. They will help you to think about what items may be deductible and what tax credits you are entitled to. Your CPA will then be able to ask you intelligent questions to help you prepare the best possible tax return. You want to have a tax return getting you the largest refund, while avoiding an audit, don’t you?
The IRS is currently auditing as many people as they can. Their auditors are trained to extract as much money from you as possible. Your best protection is to avoid an audit at all costs. Remember to follow these rules, and you too can be successful at avoiding an IRS income tax audit.