Who's Afraid of a Big Bad Audit?
Posted on Tuesday, April 05, 2005 @ 12:00 AM EDT
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amichalek writes "April 15th is almost upon us. Here's an article about what is likely to trigger an audit by Caroline Grimm Jordan MBA.
Who's Afraid of a Big Bad Audit?
Well, for starters, I am. Why would a law abiding, tax paying, honest accountant like myself fear an audit? Regardless of whether an auditor finds any problems in my return, I would still have to gather records and meet with the auditor or hire someone else to represent me. In short, it would cost me a substantial amount of time. And, as the saying goes, time is money.
As is often the case, the best Defense is a strong Offense. Knowing what triggers the IRS to take a closer look may help you avoid calling attention to your tax return. Here are some known audit flags:
Unusually large amount of itemized tax deductions. For example, you donated $10,000 to the Home for Aged Entreprenuers and your gross income was only $20,000.
Self-employment. A very broad category. This is a flag due to the temptation to hide income or claim far fetched expenses.
Home office tax deduction. Your home office must be strictly for business use. Your child's bedroom is not an office even if it's where your computer is and you meet customers there.
Cash or tips are typical in the business. Drug dealers and exotic dancers look out!
Non-traditional rental expenses. You own a tenement slum but your expenses include repairs to a Jacuzzi.
Earned Income Tax Credit. Are you hiding income to receive a bigger credit?
Discrepancies when compared to previous year's returns. Last year you grossed $100,000, this year you grossed $20,000. Or your expenses last year were 30% of your gross, this year it?s 70%. Are you underreporting income or embellishing your expenses?
Differences between what you report, and the information reported from other institutions such as bank records, dividend statements, alimony payments, etc. The government receives 1099s that say you made $40,000 but you only report $20,000.
Someone tattles on you about income you're not reporting. Perhaps the ultimate revenge.
It is very common for taxpayers to have totally legitimate situations where one or more of these flags occur. Just because you have potential flags in your return does not mean you will be audited. The IRS has a top secret formula that is applied (through use of a special decoder ring) to decide which of the ?lucky? returns will be investigated. If your return is one of the chosen, don't panic, don't flee the country. Contact your accountant or tax preparer or an enrolled agent (someone trained to represent you before the IRS). Help is available, you don't have to go it alone.
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