AVOIDING AN IRS AUDIT
I’m an honest taxpayer, but I’ve heard that the IRS is
increasing the number of audits the agency will perform this year. What is the
IRS looking for?
Most returns are selected for audits by an IRS
computer-generated program that compares the deductions you are claiming on
your return to other returns in your income bracket. To arrive at a
discriminate function (DIF) score, the formula also considers where you live,
the size of your family, and how your income is earned. For example, if you
were to report income of $60,000, live in an exclusive neighborhood with your
family of six, and claim $15,000 in mortgage interest, the IRS may want to chat
with you.
How you generate your income may increase the likelihood of
your return being selected for an audit. For example, your chances rise sharply
if you file Schedule C. That’s because the IRS is well aware that self-employed
workers have more opportunities to hide income and to transform personal
expenses into business deductions. Workers who receive much of their income in
cash, such as those in the gaming, food service, and entertainment industries,
also can expect a higher level of scrutiny.
In recent years, the IRS has enhanced its document-matching
program, which compares the information sent to the IRS by taxpayers’
employers, clients, and financial services providers to what’s reported on the
return. To avoid attracting the attention of IRS auditors, make sure the
numbers you report accurately match the information the IRS receives. Check
your W-2 wage statements and Form 1099s as soon as you receive them and, if the
information is incorrect, ask the issuer to send revised forms to both you and
the IRS.
Be sure you record the correct Social Security numbers for
yourself, your spouse, and your dependents. The government uses Social Security
numbers to check whether a child is claimed as a dependent by more than one
person. It’s also important that you review the Social Security numbers on your
W-2 forms. According to the IRS, an incorrect number on a Form W-2 results in
the return being categorized as “not processible.” In such cases, a refund is
delayed until the IRS obtains the correct Social Security number.
Verifying the accuracy of the math on your return is one of
the easiest ways to escape a second look by the IRS.
Be careful about claiming deductions for donations not in
line with your income. If you report income of $50,000 and donate $10,000, you
may be doing a noble thing, but the IRS is likely to want to know more. In such
a case, you may want to include support documentation with your tax return.
Although the rules governing who can qualify for the home
office deduction were relaxed in 1999, they are still complex and apply to only
a limited number of individuals. While
you certainly should claim the home-based office deduction if you operate your
business from your home and meet all the requirements, be aware that this might
invite IRS scrutiny. Read carefully IRS Publication 587, Business Use of Your
Home, before deducting expenses associated with a home office.
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 American Institute of Certified Public Accountants |
 Texas State Board of Public Accountancy |
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Tax
