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November
2004 On-line Tax Planning
Play It Safe - Avoiding An Income Tax
Audit
There’s nothing you can do to avoid random
selection for a tax audit, but there’s plenty you can do to minimize the
likelihood that the taxman will select your income tax return for special
scrutiny.
Here are a few tips to help you avoid this:
- Report all income. This
sounds obvious, but a hastily filed return that omits income information will
cause the Internal Revenue Service (IRS) to zero in for a much closer review.
Remember that the IRS receives reports on all
publicly disseminated income data - W-2 forms, interest and/or dividend
statements and 1099 forms. With this in mind,
get your paperwork in order, and be thorough. Sounds
simple? Perhaps not. Complications
abound for this year’s filing. New tax laws
regarding dividend income and the pending status of the bill to rebate state
sales taxes are just two of the new issues facing this year’s filers.
Your professional tax advisor can help resolve
these issues and other concerns.
- Watch your deductions.
If you file a Schedule A form and list
itemized deductions - business expenses, medical costs, charitable
contributions, etc. - remember that personal expenses do not count as
write-offs. Unusually high deductions will set
off an audit. The IRS won’t quantify what
levels tend to lead to an audit, but tax experts believe that claiming 30
percent, or more, of adjusted gross income is risky. Whatever
the amount you deduct, keep records of donations and receipts for deductible
expenses. Make sure you follow the rules
regarding medical costs (claiming only those costs that exceed 7.5 percent of
your adjusted gross income).
- Keep thorough records.
All tax filers should keep good records, but
some have more incentive to do so than others. If
you file a Schedule C, you are about 3 times as likely to be audited as
taxpayers filing a regular return. Those are
not good odds. If you are self-employed, or a
freelancer, be prepared to back up your numbers with records.
For clues as to what the IRS
"expects" to see and what might prove to be a "red
flag," check out the guidelines that the IRS provides its agents regarding
"typical" expenses and earnings for various professions. Your tax advisor can
help you locate these.
- Check your return carefully and address
errors. A mistake is a mistake, and the
IRS generally does not mitigate the interest payments and penalties it seeks
for "genuine" mistakes. However, there are
exceptions. If you can show reasonable cause
for the error, the IRS might waive interest and any other penalties.
If you have concerns about past errors,
consult your professional tax advisor, who can counsel you on amending an
earlier return, and can help you avoid future problems.
Smart taxpayers play it safe. They
keep good records, disclose all income, and can back up deductions with
appropriate documentation. And, if in doubt,
remember that we are your best source for up-to-the
moment insight and advice on income tax issues. Just
give us a call!
Tax
Planning Archives
For More Information Contact:
Bucheri McCarty & Metz LLP
2366 W. Boulevard
P.O. Box 2147
Kokomo, IN 46904-2147
Telephone: (765) 236-2300
FAX: (765) 236-2333
Internet:
info@bmmcpas.com
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