How to Avoid an Audit – or at Least, Survive It!

Contact: Gigi Thompson Jarvis
                                                                                                     202.822.6232, x119;
gjarvis@naea.org

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For Immediate Release                                                

WASHINGTON, DC (January 12, 2012) As IRS systematically analyzes the data from past years, the underreporting of income remains the biggest contributing factor to the “tax gap” – the difference between how much IRS projects it should be collecting and how much is actually collected. While many people like the idea of shoring up our nation’s finances and chipping away at the national debt by collecting overdue taxes, it would be a challenge to find anyone who wants to be audited.

Any number of small mistakes can result in that fateful communication from IRS: a faulty digit in your Social Security number, a math error, entering withholding or estimated tax payments on the wrong line (surprisingly common) can all attract the attention of our friends at IRS. Statistically, the more money you make, the more likely it is that you’ll be audited.

“On a routine personal tax return with income under half a million dollars, your chances of being audited are less than one percent,” explains Eva Rosenberg, EA owner of the popular “Tax Mama” site.

If you know there’s something in your return that will serve as a red flag for IRS, Rosenberg counsels taking the bull by the horns and including an explanation with enough detail to give IRS the full picture (also called a “disclosure statement”). This probably means filing the return on paper.

If you ever do get audited, you’ll be in good shape if you have documents that provide proof of all your income, expenses, deductions and credits. This is especially true for the deductions involving charitable contributions (remember to get receipts and appraisals for any charitable contributions), home offices, meals and entertainment and dependents. These are among the most common deductions examined by IRS. 

Home Offices.  Photos of your home office and a schematic of the office floor plan will support your home office deductions. Be prepared to show invoices and monthly bills for any kind of office equipment, utilities and technology used in your home office. Note that if you are renting business space, you probably don’t qualify to deduct a home office. If for some reason, however, you genuinely need both a rented office and a home office, include a disclosure statement explaining the situation to IRS.

If you are self-employed, another factor that statistically makes you more likely to be audited is filing a Schedule C. Self-employed taxpayers filing Schedule C run a ten times greater risk of being audited than those who have incorporated. And there’s this bonus: if you choose to incorporate, you’ll be eligible to claim more deductions than you would if you were an unincorporated business owner filing Schedule C.

Meals and Entertainment. For these deductions, good documentation can save you from a world of hurt if you wind up in an audit. Holding onto receipts with dates, times, amounts spent, names of your companions and notes on what kind of business was transacted will back up your claim that these items were deductible.

Disputed Dependents. The often disputed dependent claim is another area where good documentation can save the day. If you and an ex-spouse are both claiming your children as dependents, you should be able to substantiate your assertion with a separation or divorce agreement that outlines who is able to claim which children as dependents, where the children will live and when, and who pays for what parts of the children’s support.

Fear of an audit should not keep you from taking advantage of legitimate tax benefits. To make sure you don’t overlook allowable credits and deductions, start keeping better records, and put an enrolled agent or other licensed tax professional on your business team. If you do wind up being audited, you’ll have an experienced tax professional in your corner, able to speak directly to IRS on your behalf. 

About Enrolled Agents

Enrolled agents (“EAs”) are tax specialists licensed by the US Department of the Treasury. To locate an enrolled agent in your area, go to the “Find an Enrolled Agent Directory” atwww.naea.org.