Debra A. Simmons, CPA

How to Reduce the Chance of an IRS Audit

In Income Taxes on July 12, 2010 at 2:26 am

How Long Do I Have to Worry About an Audit?
• Generally, your tax return cannot be audited after 3 years from the original due date of the return.
• If you understate your income by 25% or more, the audit deadline is extended to 6 years.
• If you file a fraudulent return, there is no statute of limitations on an audit.
• The statute of limitations starts to run only if and when you file a return. Nonfiled tax years are always open to audit.

Audit Selection:
• Overall, the risk of audit is about 1%. If your total income is over $100,000, your chances of audit increase to about 2%. If your income is over $1 million, your audit rate is about 10%.
• If you have a high ratio of deductions to income on Schedule A, Itemized Deductions, or Schedule C, Profit and Loss from a Business, you increase your risk of being audited.
• If you are an operator of a cash business, such as a bar, hair stylist or waiter, you increase your risk of audit. Self-employed individuals, particularly independent contractors, are IRS targets as they are more likely to have unreported cash income.
• If you report losses from businesses or investments claimed on your return, you increase your risk of audit, particularly if it is a small business loss.
• If you have a complex return and prepared it yourself, or if your return was prepared by someone on the IRS’s problem-preparer list, you are more likely to be audited.

How to Reduce the Chance of an Audit When Filing:
• Start early. Any unpleasant chore becomes more difficult if it’s left until the last minute, so get an early start on preparing your tax return.
• Prepare your tax return by computer to avoid math errors and sloppy presentation.
• Don’t report less income than shown on W-2s, 1099s and other 3rd party forms. The IRS matches the documents it receives from various sources with the information you report on your tax return.
• Have supporting documentation for all deductions and credits. The IRS says that you must maintain adequate records. You should be able to produce receipts, invoices, cancelled checks and/or banking records.
• Keep good records. Assume that your return could be selected for an audit, and keep good records. Keep bank statements, cancelled checks, and records supporting income and deductions for seven years from the date your return is filed (including any filing extensions).
• Select a competent tax preparer.

For more information on the IRS audit process, contact Debbie Simmons at (310) 701-1825.

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