Tuesday, September 8, 2009

Audit Myths

Several tax blogs I've recently reviewed, including advice in the comments section, exercise the fear factor. This is concerning because fear of an audit is a poor guide for tax planning.

The best way to increase your chance of an audit is to have an income over $100,000. Refusing to reduce your taxes legally is stupid. I am not too harsh in this statement. If you qualify for a deduction, take it; if the income is excludable, don't claim it. Keep documentation to prove your position.

Any tax professional that encourages you to overpay your taxes as a strategy to prevent an audit is incompetent. Overpaying your taxes will not prevent an audit; it may let the IRS know you're a patsy willing to overpay even more. Follow the tax code to the letter and document your position.

There are more myths than tax code. The following is a list of audit FACTS:
  • An audit is NOT an accusation. An audit is a request to verify your documentation.
  • A third of audits end with little change or a refund.
  • The IRS doesn't care if you are aggressive; they care if you cheat. By aggressive, I mean, you use the tax code to your advantage. By cheat, I mean, you write-off expenses that never happened or fail to claim all income.
  • IRS auditors don't bite, not often at least. (You should laugh right about here.)
  • It is natural to be nervous about an audit. Your tax professional can help you every step of the way. The auditor will need to speak with you at least once. Tell the truth. Review said truth with tax pro in advance. The remainder of the audit should be handled by the tax pro. If you have a business, the auditor will want to see the business. The remainder of the audit should happen at your accountant's office.
  • You are not screwed if you lost a receipt. Depending on the amount and how many are missing, the IRS will probably use a reasonable number. My reasonable number is different than theirs, which leads us to,
  • If the auditor disallows something you have the right to appeal. In 98% of appeals in my office, the amount owed the IRS is reduced, sometimes to $0.

When a tax pro says they had two or three audits in the last year and they were hell, look for a tax pro with more audit experience. I handle over 50 audits per year personally; all but one or two come in off the street.

Auditors put on their pants one leg at a time, same as you and me. Their job is to add up numbers and produce a report. The auditor's supervisor is the first level of appeals. A formal appeal is required if a satisfactory outcome isn't reached.

Audits and appeals take time. Find an experienced and trusted tax pro to guide you through the rough waters of a tax audit. Then, it just might be smooth sailing.

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