I Survived an IRS Tax Audit

As one taxpayer explains, visiting an IRS building for an audit is pretty much like visiting any other anonymous corporate office buildings. Except that it might result in you writing a fat check to the government.

CNN reports:

My road to this second-floor office started with a standard white envelope emblazoned with the dreaded words: Internal Revenue Service. When it arrived at my house in December, I found a five-page letter explaining that my 2008 taxes had been selected for audit. I needed to call "WITHIN 10 DAYS to schedule an appointment."

Terror.

About 1.6 million people found themselves in this situation last year, according to the IRS. That means 1.1% of all filers drew the short end of the stick -- and about 300,000 of them were selected because of deductions related to a business venture.

That's why I got called to answer for myself.

My husband had an art gallery in Denver and the IRS had a few questions about his 2008 Schedule C, the form where you report income and deductions for your business. I'd filed the form for him, along with the rest of our taxes, using TurboTax.

Thankfully, when that big scary letter arrived in the mail, it told me exactly what expenses were in question -- all $23,000 of them. That was a relief: I always thought I'd have to show up and answer questions about any part of the return, rather than being able to prepare.

In our case, the IRS wanted to know about the rent and utilities he paid for the building, as well as a line item for "vehicle deductions."

So I dutifully called Ms. Green, the name at the top of the letter. The problem was, I told her, it was my husband's business. And we're in the middle of a divorce.

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10 Ways to Avoid a Tax Audit

Worried about an IRS audit this tax season? You can never be 100% audit-proof, but there are a few actions you can take to greatly reduce your chances of being red flagged.

Here are 10 ways to avoid a tax audit, courtesy of the Wall Street Journal:

1. Choose your tax return preparer with care. Today, according to the recent National Taxpayer Advocate report, 60% of individuals and even a greater percentage of businesses use paid preparers to do their income tax returns. Yet, preparers now face more intense IRS review. If the IRS believes a preparer is claiming unwarranted deductions or taking other fraudulent steps on clients' returns, then the preparer's clients are at risk for audit.

The IRS has eight tips for choosing a tax preparer. Key among them is to check the preparer's history to see if there has been any disciplinary action. For example, if you use an enrolled agent, check with the IRS' office of Professional Responsibility at opr@irs.gov (include the preparer's name and address).

2. Report all of your income. The IRS uses information returns, such as W-2s and 1099s, to cross-check income reporting. Under its document-matching program, the IRS' computers compare information on the forms with the income reported by taxpayers on their returns. If the information doesn't match, this leads to an automatic audit. But don't panic; it's merely a correspondence asking about the discrepancy. It can be easily cleared up by submitting an explanation by mail if you think you are correct, or paying the tax owed if the omission was your oversight and the IRS is correct.

Sole proprietors, freelancers and independent contractors who use the cash method of accounting may be vulnerable to year-end payment problems. For instance, a sole proprietor that performed work for a client may have received a payment in early January – but the client might have mailed (and recorded) the payment in December. The client will include the payment on Form 1099-MISC for 2010, but it isn't taxable until 2011. What to do: Include the payment as it is reported on the 2010 return, but then subtract the payment and attach an explanation with the return. Then include the payment on the 2011 return, even though no 1099 will be issued for this year.

3. Provide complete information. All questions should be answered and all required information should be included on the forms and schedules necessary for your return. That means if you're a sole proprietor, include your business code number, accounting method, and, where applicable, inventory valuation method on Schedule C. If information is missing, it could trigger a more extensive look at the return.

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IRS Tax Audit Myths

A few weeks ago a handful of employees from Roni Lynn Deutch, A Professional Tax Corporation and Roni Deutch Tax Center® got together to put together a series of educational videos. The first episode was published over the weekend, and I wanted to make sure and share it with all of you. Check out the embedded video below, where James discusses common IRS audit myths. Also, be sure to stop by my YouTube channel to subscribe to my video feed!