5 ways to avoid an audit Don't invite IRS scrutiny. Make sure your return is neat, complete and self-explanatory. February 7, 2003: 10:21 AM EST By Sarah Max, CNN/Money Staff Writer
NEW YORK (CNN/Money) - Worried Uncle Sam will put his reading glasses on and take a second look at your tax return this year?
Your fears are not unfounded.
In 2001, 1 in 174 tax filers were audited, but these numbers vary greatly by region and tax bracket. For example, low-income filers are about twice as likely to be audited as high-income filers, according to data published by Syracuse University. But high-income taxpayers in the Los Angeles area were 8 times more likely to be audited than those in Georgia in 2000. (As of 2001, the IRS stopped disclosing regional audit rates.)
The formula the IRS uses to determine who gets audited is a closely guarded secret. "It's like the chemical composition of Coca-Cola," said Fred Daily, a tax attorney and author of the book "Stand Up to the IRS."
What we do know is that each and every tax return gets a computer-generated score. "They're grading for audit potential, and the more your return deviates from the norm, the higher your score," Daily said.
For example, if the average person in your income bracket claims $500 in charitable donations, but you claim $5,000 in donations, you're likely to score high, and that's not a good thing.
About 10 percent of the highest-scoring returns are passed on for closer examination by an IRS employee who determines whether it warrants an audit. "Your job is to stay out of that 10 percent," Daily said.
Keep it neat Appearance does count for something. "The worst thing you can do is turn in a hand-written return," Daily said. "You want your return to at least look like it's been done by someone who's paying attention to detail."
Your return will have that put-together look if you hire a tax professional to do your return or do it yourself with a tax software program. By using a computer, you're also less likely to make math errors, which are the number one problem the IRS finds when checking returns.
Include all W-2s and 1099s According to Jeffrey Kelson, a tax partner in the New York office of BDO Seidman, one of the most important things you can do to avoid an audit is simply make sure you include every W-2 or 1099 in your return. "The IRS receives [copies of] those automatically [from your employer and brokerage firm], so if your return doesn't include them you could provoke an audit," he said.
Keep in mind that W-2s and 1099s do get lost in the mail. Just because you didn't receive one doesn't mean the IRS didn't get its copy. For this reason, you'll want to account for tax forms by matching them against such things as check stubs and investment statements. If you've been keeping good records throughout the year, this job should be easy.
Also, don't overlook other kinds of income or capital gains, like gambling winnings, pay for jury duty, property you've sold or even state tax refunds.
"I once cashed out a bunch of savings bonds in the middle of the year and forgot about them," said Jackie Perlman, a senior tax research analyst for H&R Block. "Then I got a nice little love note from the IRS saying they'd corrected my return."
Claim business expenses with care Although the IRS's formula for who does and does not get audited is a mystery, tax experts say one thing is for sure – large and unusual deductions raise red flags.
"I'm not saying you shouldn't claim deductions," Kelson said. "Just make sure they are legitimate and you have the documents to back them up."
Business expenses and home-office deductions, in particular, invite scrutiny. In fact, in 2002 the IRS small business/self-employed division beefed up its staff to help crack down on, among other things, excess business travel expenses and home-office expenses that have more to do with the home than with the office.
The IRS also keeps its eye out for absurd tax claims. "We get calls from tax pros all over the country and you'd be amazed at the kind of things people come in and think they can deduct," Perlman said. "If you're not sure about a deduction, talk to someone who knows the law, not your Uncle Louie."
Document your deductions While it's true that the IRS is looking to see how you compare with people in your tax bracket, your profession, even your ZIP Code, an audit is not imminent if you don't stack up.
You do, however, need to do a good job of explaining yourself if you have some unusual items on your return.
For example, if you want to claim a large casualty loss because your house was wiped out by a hurricane, it's not a bad idea to include in your return some kind of bill for the damage along with a newspaper clipping of the event, Daily said.
If you are an employee of a company and do not get reimbursed for a lot of work-related expenses, you can deduct those. "But don't just slap $10,000 of miscellaneous expenses on your return," Perlman said. "You need to explain that you work for company XYZ and do not get reimbursed for XYZ expenses." While you don't need to include all your receipts with your return, be sure you have the receipts to back up these deductions if Uncle Sam comes knocking.
"The bottom line is, think like an IRS auditor," Perlman added. "You don't want them to pick up your return and say 'what the heck is that?'"
Check your return Your English teachers couldn't emphasize enough the importance of proofreading your work, and neither can tax gurus. Once you've finished your return, check your math, your Social Security number and other details, and don't forget to sign it.
While these errors won't necessarily lead to an audit, they may give the IRS no choice but to read your return and send it back to you for corrections.
"Remember, you don't want to have any more correspondence with the IRS than is necessary," Kelson said.
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