What You Need to Know About IRS Auditing

In any discussion of taxes, the dreaded concept of “auditing” inevitably arises.

According to MarketWatch, the IRS audited only 1% of taxpayers in 2008 — and only .95% of taxpayers who made less than $200,000. Still, the possibility exists, so read on to find out what you need to know about IRS auditing, especially about how you can best avoid being one of the unlucky chosen few.

If I am audited, will I owe more taxes?

Most likely yes. Only about a quarter of those audited by the IRS don’t end up owing more in taxes.

What are some of the “red flags” for an audit?

The following are some of the reasons people receive the news that they will be audited:

  • They have claimed the home office tax deduction, bad debt expenses, casualty losses, medical expenses, and business travel, meal, and entertainment expenses.
  • They work in cash businesses (waitress, bartender) or keep their own books (accountant, lawyer).
  • They are small business owners, especially those who file a Schedule C.

How else can I reduce my chances for an audit?

The following are some steps you can take to help reduce your chances of being audited:

  • Use a computerized system to figure out your taxes, reducing the chance of calculation mistakes.
  • Avoid using round numbers for large deductions (it may look like you’re estimating).
  • Fill in all the blanks; even if it’s just a “0″ or “-” make sure the IRS knows you’re not just forgetting to write something.
  • Make sure your state income tax returns match your federal ones.
  • File as late as possible (many tax professionals say that the chance of being audited decreases the later you file as audits are chosen throughout the filing time and the quota may have been reached by the time you file).

Do I have to let an IRS auditor into my house?

No, unless the auditor has a court order; that said, if you’ve claimed the home office deduction, he’s probably looking to check up on that and by not allowing him inside, you’re almost guaranteeing your deduction will be disallowed.

I’ve received notice of an upcoming audit, but haven’t heard anything else from the IRS. Should I call them?

No. It’s up to the IRS to complete an audit within three years from when you filed your return or from its due date. There’s no need to remind them of this, as you might just get lucky and have the time run out before the audit is completed.