Tax Woes: Avoiding An Audit

Now, getting down to avoiding an audit. There is no foolproof way to avoid the procedure, but there is a way to give yourself, say, a 90% chance of being passed over.

It's true that if your income is over £25,000, you've got a good chance of having your 1040 flagged automatically for checking by an Internal Revenue man. The trick is to make sure - or as sure as possible - that he'll scan your tax return, and then tuck it back into the file without embarrassing questions - or an audit. At the outset, the tax professionals stress two points.

The first seems improbable, and just a bit naive. It isn't. It is the question of neatness and simple mathematical accuracy in making out the 1040. "It means a lot," says a Essex tax man. "It gives the agent more confidence in your return, and he is more apt to pass it by."

The second point concerns the occasional big item that should be, but often isn't, checked over with an expert. Such things as how to report a sizable sale of a security where there's a later repurchase, a real estate deal where capital gains tax is due, the use of income-averaging, or such. The idea, of course, is to consult somebody if you have any doubt about how to properly report the item - or to what extent it needs to be reported. "But," says the Essex expert, "you needn't necessarily rush out and line up a man to do your entire 1040 - especially if you realize your problem on April 14, the day before you must file." He adds: "You might pick up enough advice in a 10-minute phone call to stay out of trouble."

Deductions can get you involved in an audit, even if the amounts aren't excessive. IRS agents look for certain tipoff items. On contributions, for example, bunching sizable items under "miscellaneous" is a sure way to attract attention. Instead, attach a list. If you donated property (a painting, shares of stock), explain how you arrived at the value. If it's over £200, state clearly that there are no conditions attached to the gift, and clip to the 1040 a signed copy of any appraisals. Ignoring this may get you an audit. A high interest deduction can trip you up if it's not logically explained by a sizable house mortgage or other loan. If you have such a deduction, add a brief explanation to your return.

On state and local sales taxes, note: (1) If you bought a big-ticket item (car, boat, or such) give purchase details; and (2) though you are allowed to deduct more than amounts shown on the sales tax tables in the 1040 instructions, you're asking for a call from IRS if you fail to explain clearly the excess.

Casualty loss claims can make your return liable to audit, especially if you fail to itemize and explain how you arrived at the loss. Theft and vandalism losses have been way up. If you deduct, give the date and details of the police report. If you made no police report, you're asking for trouble at IRS. Also, claiming household accident losses, such as dropping a ring in the garbage disposal unit, may mean an audit.

For the businessman, heavy travel and entertainment deductions remain a pitfall, and the mixed business-pleasure junket gets special attention. One tip: Use IRS's special form for "T&E" items - it may save you from an audit. And put unreimbursed business entertainment items down as itemized deductions - don't mix them up with travel expenses, which go down as deductions from salary. Muffing this point may flag your return.

Business education deductions generally are safe - if they're clearly job-related. Again, you can avoid trouble by a clear explanation. If you changed jobs, you can deduct a consultant's fee provided he helped you relocate. If he didn't get you a new job, the question is closer. New cases show a liberal trend, and you might be smart to check on the latest advice with a good accountant. Deductions for the cost of investment advice will bring you no trouble - provided your return shows capital transactions or proportionate investment income.

Attaching original records to your 1040 is a blunder. The same applies to machine copies of most records involved in your tax return. Also, keep your explanations of items on your 1040 brief and concise. "If you attach long, detailed explanations," says an old pro, "the agent may be tempted to toss your return on the audit pile."

Remember to keep your tax paperwork for at least three years following your April filing. IRS can audit your 1040 at any time in this period. The delayed audit - especially more than a year after filing - frequently comes as a shock to higher-income taxpayers who may have breathed easy a little too soon. Stock purchase and real estate records should be kept, of course, until you sell the property, no matter how many years. Note, too, that if you expect to someday use the liberalized income-averaging rules, you must keep all income records for at least five years.


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Don't Panic If Irs Calls You In

Next, there's the question of facing up to the opposition - the Internal Revenue Service. And, for most people (sharpies aside), it really isn't all bad. If you filed your last tax return with a nagging doubt, don't become too up tight if the IRS calls you in. This can happen, especially to an executive or professional who's' income is healthy, even if his 1040 is as innocent as a Walt Disney cartoon.

Obviously, unusual deductions and offbeat transactions, such as income-averaging, may flag a return. But so can high income alone. The rules on who gets audited (or partially audited) are not clear-cut. Figure that there's at least a 10% chance of your return being flagged for possible audit... see: Don't Panic If Irs Calls You In