Tips on How to Avoid an IRS Audit

"How to Avoid an IRS Audit"

Step One:

If you're using a tax preparer that does not have a good reputation, you could be putting yourself at risk for a tax audit.  If you're tax preparer has been identified as a person who takes frivolous reductions on returns that could increase your probability of being selected for an IRS audit. 

Remember, the tax return that's submitted on your behalf, is ultimately your return.  Even though it's required to be signed by a tax preparer that you have hired, you need to be sure you understand all the information that's on the return.  If it's a couple of years later, and you've been selected for an audit, YOU need to justify and submit documentation and receipts for the information that is reported on the return.  While the preparers can have preparing penalties assessed against them, you will have to pay the interest penalties and additional taxes that are due.

Don't ever go to a practitioner that guarantees you a refund.  Be sure that whatever is reported on your return is as it is.  If you're due a refund, you're due a refund.  Don't shop around for a tax preparer who can guarantee you additional cash in the mail.  Make sure that what's reported on your return is accurate. 

So, when seeking a tax preparer, if you want to avoid an IRS audit, make sure it's not a person that is going to guarantee you a refund.  Make sure it's someone who will prepare a complete and accurate return, and who will go over that return with you so that you understand what's included.

Step Two:

Whether your return is prepared by hand, or your return is computer-generated, there are certain things you need to be sure of before submitting your return.  First, make sure that ALL social security numbers are correct and accurate and have been completed for the taxpayer, the spouse, and all of the dependents.  Be sure that whether your return is computer-generated or prepared by hand, that all the numbers foot down the return.  If any of the numbers have been edited or changed, be sure that the math is accurate on the return.

The information on page one of your return, i.e. your 1040, (if that's what you're filing), flows over into page two of the return.   Check that the information shown as withholding on the return is supported by W-2's or 1099 statements as well.  The net result should be in agreement with the IRS's records.  Make sure that your return is signed and dated before submission.

Returns should be prepared and submitted in order.  The first two pages of the 1040 are followed by the individual forms that support the return.  If you're filing Schedule A, that should be next in the return.  All the supporting Schedules should then be placed in the return alphabetically, first the lettered schedule forms, and then the numerical forms in numerical order.  Make sure that your return is not sloppy, and that it is as complete, accurate and concise as it can be.   If your return is messy and the IRS cannot read it, then they have to guess and that is not to your best advantage.  So make sure the return is legible, neat, and completed with the all the blanks filled in that need to be.

Step Three:

One of the best ways to avoid an IRS audit is to keep your receipts for tax deductions.  You can keep your receipts in many different ways.  They don't have to be totaled, and tallied up year by year.  But at least make sure you are keeping the receipts.  They can be loose, and make sure they are legible.  A good way to keep your receipts is in a waterproof container.  You may want to sort them in different ways.  For example, you can sort them by months, by vendor, or by deduction.  Or you can have receipts for rental properties together, or Schedule A receipts together.  The most important thing is that you keep the receipts, keep them in something that's going to protect them, in a safe place so they are not stolen or misused.  Be sure you know where they are, and keep them in a place where you can organize them and get to them easily.  This will benefit you greatly if you're selected for an audit. 

If you want to avoid an IRS audit, keep your receipts, and keep them organized.  If you are audited, you will get through it with no problem.  And in the end, this may avoid future audits.

Step Four:

If you have invested in a lot of real estate and you own a lot of rental properties, when you're preparing your tax return, be sure that on your Schedule E, you are listing the addresses of your rental properties, and what kind of rental properties you have.  If you have rental income properties that are consistently giving you losses in excess of your income and considering depreciation, this may be an area that the IRS would look at in an audit.  So you want to make sure you're including on your tax return, all of the information about your properties and that they are truly rental income properties.  If you're including a second home that you have no income for consistently over a period of time, you may want to make an explanation on your return about why you have this expense on your return that's not accompanied by some income.

So, if you're an investor in a lot real estate, be sure that the real estate on your return is documented as Schedule E investment property, instead of perhaps needing to be included as a second home property on your Schedule A form.  You can help to avoid an IRS audit if you include a statement in your return about your rental income and losses. 

For more information on how to avoid an IRS audit, or if you have additional questions or concerns regarding your returns, call Bernie at 407-677-1040 to set up a free initial consultation or go to our website at: www.orlandoaccountant.net

~Bernard Kiesel, CPA