3 tips for avoiding an IRS audit
By Peter Andrew
One of my favorite films is "Le Dîner de Cons" (The Dinner of Fools). Yes, it's French. But it comes with subtitles, and I can read. And it's about the funniest movie I've ever seen.
In it, a group of ghastly, elitist Parisian businessmen meets for dinner every week, and its members take turns to invite the most boring and/or stupid person they can find -- just so they can make fun of him or her. One week, one of these insufferable snobs brings along a minor civil servant, whose hobby is (guffaw, guffaw) making matchstick models of public buildings. Unfortunately for the group, the man is also a tax inspector, who subsequently sets out to wreak righteous revenge through his job. Add in troublesome wives and mistresses, and you have all the ingredients of a truly hilarious farce.
Tax audits may be funny when they happen to other people (especially, perhaps, if they're European snobs), but they're a whole lot less amusing when you're the one on the receiving end of them. You can't eliminate the chance of your being audited, because a small number of filers are chosen at random each year by computer. But here are three ways in which you can keep improve the probability of your flying below the IRS's radar:
1. Check your work
Nobody enjoys filling out tax forms, but it pays to take care when you do. One of the commonest audit triggers is incorrect math. Unless one of the characters in "The Big Bang Theory" was based on you (and not the ditzy neighbor), use a calculator or specialist software.
Another common trigger is incomplete filings. You know that bit of paper you got from the bank that said you earned $12 interest last year on your savings account? Well, the IRS got a copy too, and it's on its computer. If you forget to list it, you can expect a letter -- or a visit. This applies to 1099s, W2s and all the other forms you receive: The tax people automatically get copies of them all, and your failure to include anything suggests you're careless -- or worse -- in reporting your income.
That appearance of carelessness can also arise if you're late filing or forget to sign your form. Your objective should be to not stand out, and your strategy should be to comply with IRS requirements as much as you can.
2. Don't be an outlier
We all want to make our deductions as high as possible, but you should be prepared if your return doesn't appear realistic to the IRS. The IRS's clever IT systems profile filers, and know what people like you should normally deduct. If you're a statistical freak, then the computer is likely to flag your file for review by an experienced auditor, whose job is to decide whether your case should be followed up.
Of course, this shouldn't stop you from claiming every cent you're due. But you need to give the auditor reasons why you're deducting so much. So, when you're filling in your forms, provide notes explaining why your claim is legitimately outside the norm.
3. Keep your preparer honest
According to the National Taxpayer Advocate's 2012 report, nearly 60 percent of all taxpayers hire someone to prepare their filings for them, while another 30 percent buy commercial software to help them with the task. If you decide to pay a preparer, you might think that you're shifting the burden to a professional, whose advice you should take. But that's not an argument that's likely to get you far with the IRS. You sign your form: You're responsible for what it says.
This makes it important to choose your preparer carefully. Often, it's a good idea to use someone who's personally recommended by a friend, relation or colleague you trust. And it's almost always wise to avoid those making extravagant claims about their ability to reduce your tax burden. Billionaires may be able to afford armies of specialist accountants and lawyers to minimize what they pay the IRS, but the chances are tiny of your happening across someone who can significantly reduce your liability.
Why you shouldn't panic over audits
The IRS's latest figures, which relate to the 2011 fiscal year, suggest the possibility of your being audited is small. That year, there were 185 million tax filings, but only 1.7 million audits (0.9 percent). Of those audits, nearly 1.2 million didn't involve a face-to-face meeting, and were instead settled through correspondence.
That leaves just 525,000 that saw one or more meetings in an IRS building or at a taxpayer's home or business. And 34,000 of those field audits resulted in the taxpayer receiving a refund.
So there's no need to fret. You can reduce even that small chance of your coming to the IRS's attention by following those three tips for keeping a low profile. Oh, and there's one more: Don't invite IRS auditors for dinner in order to humiliate them.
Peter Andrew has over 25 years of experience writing about marketing, advertising and management. He regularly covers consumer credit card topics for IndexCreditCards.com and other personal finance publications including Fox Business, TheStreet and MSN Money. He also writes frequently about mortgages and auto loans. Peter has spent extended periods living overseas, in the UK, France and Africa. He lives with his partner of 20+ years, and wastes too much of his time on cryptic crosswords.