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March 25, 2011 > How to Avoid an IRS Audit

How to Avoid an IRS Audit

What you Need to Know to Defend Yourself

As tax day quickly approaches, many ask the question, "What can I do to avoid an IRS Audit?" Avoiding an IRS Audit may become increasingly more difficult. Under President Obama's 2012 Budget Proposal, the IRS will be allowed to hire 5,100 new revenue agents. Obama's proposal calls for a 9.4 percent ($1.13 billion) funding increase for the IRS for fiscal year 2012, to $13.28 billion. With the addition of these new agents, the IRS will be able to pursue tax cheaters and delinquent taxpayers more aggressively than before.

So how can you dodge the bullet during the auditing selection process? Although there is no way to completely avoid being selected for an IRS audit, there are steps you can take to minimize the likelihood.

1. Be honest - Living by the simple rule of honesty will save a lot of stress. Report all income including; unreported interest, dividends or miscellaneous income. The IRS has records of all your 1099s, so be sure to report them. Omitting income will raise a red flag. Be sure to properly report all your expenses and deductions.

2. Be organized - Keeping good records is important. Properly record any expenses that will be deducted. Business expenses such as travel, meals, mileage etc. can be deducted, as long as they have been recorded. Keep all receipts, they will help to prove an accurate deduction. Be sure to give exact numbers versus rounding. When it's time to submit your return, double check and make sure there is no missing information or signatures.

3. Be prepared if you are self-employed - The IRS realizes that self-employment also increases the likelihood of unreported income. You must have proof of all income and business expenses if you are self-employed. Do not record personal expenses as business deductions.

4. Watch your deductions - Taking deductions that are unreasonable for your income bracket may raise a red flag to the IRS. The IRS uses a computer to select returns to audit. This computer gives each tax return a score and your score is compared to others within your income bracket. High scores result from unrealistic deductions within certain tax brackets. High score returns are passed on to an IRS agent for review. Be sure you have proof to back up all deductions.

5. Avoid Fluctuation in Income - The IRS has a good idea of how much you make; if they notice a drastic change in your income this may raise another red flag. Be aware of reporting abnormally low income for your profession. On the flip side, be extra cautious if your income is over $100,000. IRS audits are five times more likely in this tax bracket.

6. Watch your Number of Charitable Contributions - Charity is important, but be aware that a red flag may arise if you made a lot of contributions. Hold on to all receipts, particularly if donating five times as much as the average person in your income bracket.

7. Use a Tax Professional - The best way to prevent or avoid an IRS audit is to use a CPA or accounting professional. These returns are often less likely to be selected for an IRS audit than a self-prepared return. A professional knows the laws and can help you to make sure that all proper deductions are taken and that all income is reported.

Taking these steps in preparing your return can help you to avoid possible red flags that could lead to an IRS audit.

Alan L. Olsen is Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP, a leading CPA firm in the San Francisco Bay Area. With more than 25 years of experience in public accounting, Alan works with some of the most successful venture capitalists in the world, developing innovative financial strategies for individuals and businesses. For information on filing your tax return this year, contact Alan at 866-CPA-2006 or at www.groco.com.

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