Thursday, June 21, 2012

Ten Things to Know BEFORE Your Income Tax Audit

Being hit with a tax audit can be intimidating, nerve-wracking, and even downright scary - but they don't have to be. When it comes to audits, knowledge is your best asset. Here are some tips everyone should know to avoid an income tax audit, and how to be prepared when one strikes:

1. Know Your Red Flags.

The IRS is a huge organization, and it relies on prioritizing to keep running smoothly. This means that, rather than poring over every case with a fine tooth comb, tax examiners tend to focus harder on "high-risk" cases. Do you keep offshore accounts and trust funds? Did you file multiple tax exemptions? Have you flat-out not filed a tax return? Then be prepared, because an audit is more likely to come your way.

2. Know Your Company.

When it comes to the IRS, the best offense is a good defense. Are you up on financial transactions at your company? Have you analyzed expense reports for legitimacy? Are you aware of which business expense deductions are available to you and your company? Do you have third party options to validate any expenses not covered by a receipt? These are all things to think about - and things you should know about before the IRS does.

3. Know Your Mathematics.

Even the most experienced financier can make a small subtraction slip-up, but few things send up a red flag faster than a major miscalculation. Whether you have your taxes done or do them yourself, get a second opinion from a fresh pair of eyes. A proper report now will save you a lot of trouble later on.

4. Know Your Means.

It's as simple as it sounds. Whenever living large and tax return red flags combine, a tax audit isn't far behind. The IRS can check your yearly income against your living expenses, and use your testimony against you, so make sure you can prove that you've been living within your means.

5. Know Your Deductions.

Deductions are the most precarious part of filing a tax return. Left open to relative subjectivity, frivolous (or downright fraudulent) deductions are the most common method for attempting to cheat the system. Even if your deductions are 100% legitimate, unusually high or extensive items might be enough to raise a red flag for the IRS. Your best line of defense is to document everything: keep your receipts, show your calculation work, and make sure you file the correct forms.

6. Know Your Position.

Taxes can be especially tricky for independent contractors: not only are there extra forms to deal with, but tax auditors may still reclassify you as an employee of a company and attempt to collect unreported payroll taxes (plus penalties and interest). Through effective use of forms and the 20-Factor Test, however, these audit claims can be properly defeated.

7. Know What NOT to Say.

Think you got one over on the IRS with your deft maneuvering? You would do well to keep that information to yourself. The IRS rewards informants with a share of the extra fees (and fines, and penalties, and interest) collected, so don't be surprised if you find yourself hit with an audit. If that interview does come, don't expect glossing over answers over with quick cute excuses to work in your favor toward a shorter audit - those answers could be used against you later as criminal intent toward tax evasion. Choose your words wisely.

8. Know Your Rights.

So, you were chosen for an audit? You will be interviewed, and you will be scrutinized. That said, you are not entirely powerless. According to Section 3503 of the IRS Restructuring and Reform Act of 1998 (RRA 98), you have a right to know why you are being audited. You also have a right to record your interview, ask to transfer your case to another area, and even file a misconduct report if your auditor is acting out of line.

9. Know Your Opponent.

A common mistake among individuals facing an audit is to underestimate the intelligence of their auditor. People like to rib them with names like "bean counter," but rest assured, this is your auditor's career. It took years of intense schooling and experience in accounting and auditing to get to this point, and along with that sort of practice comes an innate savvy for getting that job done. They've dealt with every type of person under the sun. If you haven't, or just aren't sure, your best bet is to get a professional on your side: the tax attorney.

10. Know Your Tax Attorney.

Doing taxes can be a frustrating and confusing process, and even reading these tips may leave you with more questions than answers. That's all right - that's what tax attorneys are for. A good criminal tax attorney will prepare you on a personal level for every possible aspect of a tax audit, and will aggressively fight on your behalf. A good tax attorney knows how to speak an auditor's language, from the right answers to the right time to stay silent. Whether you're trying to navigate a tough audit or simply avoid one in the first place, a good tax attorney can guide you there safely.

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