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How to Avoid an IRS Tax Audit - Tips and Warning

By Edited Dec 6, 2013 0 0

This is the second article that I wrote on "How to Avoid an IRS Audit - A Taxpayer's Guide". In this article, you'll learn on how to avoid an audit that could save you time and money.

You can avoid a closer scrutiny from the IRS once you properly report all your income on your tax return and provide enough documentation. You may also educate yourself about tax law so that you will not receive any letter requesting a meeting from the IRS.

Difficulty:
 
Moderately Challenging

Instructions

things you'll need:

  • Financial Forms and Statements
  • Paper and sign pen
  • Computer and internet connection
  • Tax preparation software
  • Calculator

Tips & Warnings

  • People with offshore bank account deposits should indicate on their tax returns if they have one or more. They should also include the interest income coming from those bank accounts on their returns. Check the official website of the IRS if you're required to file a U.S. income tax return for your foreign bank account deposits.

  • It's advisable to send a written response through a certified mail with a return request receipt if you'll have a dialogue with the IRS. Get the name of the IRS representative if you'll talk through the phone then write and send a follow-up letter. You can use these letters of communication if ever needed since verbal promises and agreements could be easily disregarded.

  • It's the aim of tax agencies to deliver and assess tax returns electronically nowadays although an income tax return that will really require proof of original statements and documents needs to be mailed if necessary.

  • The chances of miscalculation could increase if you're a very high earner. People who have a huge income have more deductions on their tax returns. Most wealthy individuals will hire tax professionals especially if they have plenty of stock transactions, various businesses, homes located from other places, and charitable contributions.

  • Rich people will also hire an accountant if they have a very complicated tax return. Hiring a tax professional could be more cost-effective for them. They just want to avoid mistakes because the more money they make, the more chances errors will occur and they could end up paying a lot due to the penalties involved.

  • If you think that you really can't pay your taxes, you need to contact the IRS at 1-800-829-1040. You may be granted a certain time to pay either it in through an installment basis. You could be given this particular agreement to pay your taxes little at a time depending on your circumstances and life situation.

  • Comply with the rules and regulations so that you can avoid large amount of penalties if you have overseas bank accounts. Offshore bank account deposits will likely be tracked down by the IRS auditors. It's time that taxpayers with accounts abroad disclose them since the IRS are planning to spend some resources going after those individuals with huge foreign deposits.

  • Avoid penalties and interest by filing an automatic six-month extension if ever you can't meet the filing deadline. For state taxes, use form IT-370 and for federal taxes, use Form 4868. These official forms are available through the official website of the IRS at: www.irs.gov. They can be downloaded and filed electronically free of charge.

  • Don't exaggerate and exceed to much on home-office tax deductions. A home office is usually the principal place of a business that's why you should avoid deducting expenses from your home office if you have an employer who had given you an office at the business location where you work.

    Be cautious not to deduct the same expense twice since this can raise a red flag and explain the ones that have unusually high deductions. You also need to provide a well-written statement, your calculations, and a clear but short explanation of your rationale for those extraordinary expenses.

  • Be accurate when determining the value of non-cash items like cars, art works, and furniture. A requirement of a qualified appraisal would be needed in order to check valuable items. 

    You can assess the value of smaller items and this is generally based on the resale value at the time of the said donation. Always try to keep those detailed records and refer IRS guidelines so that you'll be able to justify every deduction you take.

  • If you're a homeowner who had taken a loss on your principal residence, you're not allowed to file a tax deduction. For example, if you sold your house for less than what you purchased it a long time ago, you can't deduct the loss but if you made profit on it, the income is considered a capital gain that should be properly reported to the IRS in order to avoid a tax audit.

  • Avoid visiting fraudulent sites that may capture any financial information from you, go to the official website of the IRS at: www.irs.gov for more information.

    Audits may be random, but generally could be the aftereffect of those statistical comparisons. Your bigger amount of deductions may trigger an audit but you have all the right to take those legitimate deductions. You can simply answer those questions in a confident way if you can also provide correct and enough documentation.

    Try your best to do the math correctly especially if you're not using a good tax software to prepare your tax return. If you're doing it the traditional way then make sure that you're accurate with regards to your additions, multiplications and subtractions. 

    Take note that those small errors can be added up and may only lead to a complete audit from the IRS. With the recent economic crisis that is taking place around the world, the IRS could likewise increase the percentage of audits every year.

    If you're selected for an IRS audit, calm down. Simply respond immediately and be honest to the IRS investigator that will be assigned to your case. As long as you have proper documentation during the audit, then you have no problem at all. Some taxpayers think that if they get audited, they will owe the IRS money. Take note that there could be some cases where taxpayers could even get something back from them.





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