Some people think of a tax audit like any type of IRS inquiry and dread receiving any mail with an IRS return address. Even more terrible is a letter calling for a meeting. Including all of your earnings on your tax return, providing sufficient documentation, and understanding the tax law can help prevent your tax return from receiving further scrutiny.
Here are a few things you’ll need in addition to our 12-step program to stay out of an audit:
- financial statements
- Financial calculator
- paper and pencils
- computers
- Tax preparation software
Step 1
Report all of your earnings on the correct forms and on the correct lines on your tax return. For example, W-2 income pertains to form 1040, line 7; income from housing or office rental belongs to Schedule E; and 1099-MISC non-employee compensation must be shown on a Schedule C.
Step 2
Get an adjusted copy of a W-2 or 1099 from the issuer before you file your return if the original is incorrect. Similarly, claim a deduction for payments to an independent contractor only when you provided a 1099 (or the payment was less than $600).
Step 3
Report all income that is assigned to your Social Security number. The IRS efficiently compares the information returns you receive with what you entered on your tax return.
Step 4
Assign the income reported as yours to the correct person by providing a 1099 to that person and mailing a 1096 to the IRS. Often this must be done with interest income earned on a joint savings account.
step 5
Include tips and cash payments you received for work or sales, plus the value of any services you exchange, on your tax return. Not declaring your income simply because there are no official documents can come back to haunt you.
Step 6
Report hobby income on Form 1040, line 21 instead of trying to treat your hobby expenses as a business loss.
deductions
step 7
Keep careful records, following IRS guidelines, to substantiate the deductions you claim.
step 8
Be careful not to deduct the same expense twice, for example, on Schedule A and the same way on Schedule C or Schedule E.
step 9
Somehow explain a remarkably high deduction. For example, if your tenants vandalized a rental home, list the repair costs under “Other Expenses: Tenant Damages” instead of the generic “Repairs” section.
step 10
Provide a clear but concise statement, calculations, and description of your justification for unusual expenses. Label the declaration with the form and the line number to which it refers, write “Stmt”. next to the line number where you claim the deduction, and staple the return to the back of your return. Attach a photocopy of a document that supports your claim. Proof of being legally blind is a standard and mandatory document; A copy of a formal contract signed to repay a loan can be helpful when a bad debt loss is incurred.
step 11
Use whatever method is appropriate for your profession and personality to keep accurate records of your business mileage.
step 12
Round your deductions to the nearest dollar, not to the nearest tens, hundreds, or thousands of dollars.
Guess-Free Tax Guide was established to take the guesswork out of the average consumer’s annual conundrum about which online tax software to use, what the “hidden deductions” are this year, how to save money in these tough times, and just as importantly , how to avoid an audit.