Tuesday, April 17, 2012

Meet the real Dodgers!

Tax deadline: 5 quick tips to avoid and IRS audit

The IRS fails to get 1 of every 6 tax dollars its entitled to, so its on the lookout for fraud. But there are steps you can take to reduce the risk of an audit.

By Mark Trumbull
Monday, April 16, 2012
Occupy Wall Street protesters dressed as a baseball team named 'The Tax Dodgers' participates in a rally near Central Park in New York Saturday. (Keith Bedford/Reuters)

The Internal Revenue Service wants you to pay your taxes – and it's ready to come after you if it suspects you haven't done so.
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The vast majority of taxpayers don't get an IRS audit, but about 1 percent do. And the risk of an audit rises if you have a high income or run a business.

It's part of the agency's effort to collect what's due to the US Treasury at a time when an estimated 1 in every 6 tax dollars owed never shows up. The "tax gap" between what is owed and what is paid totaled some $385 billion in 2006, the latest year for which the IRS has attempted an estimate.

"Virtually all major initiatives launched by the IRS since 2008 have been designed to focus on the tax gap through more effective enforcement or improved service to taxpayers," the agency said in a January press release.

In other words, the IRS is dangling some "carrots" (trying to make it easier for honest filers to pay what they owe) as well as "sticks," such as audits and other collection efforts.

To some extent, your risk of an audit simply is what it is. If you run a home-based business and have a lot of deductions, your chances of getting questioned by an IRS agent are a lot higher than if your only income is listed on a W-2 from Ford Motor Co.

But you can also help yourself, tax experts say, by not rushing to push the "send" button or to drop your return in the mail. A few moments of double checking can sometimes reduce the risk of an audit, or save you some money if you catch a mistake.

Here are some steps to consider:

1. Check your math. When IRS computers scan through millions of tax returns and flag the ones most likely to contain under-reported tax obligations, one of the red-flag issues can be math errors. Also check the basic facts, like listing your Social Security number correctly.

2. Report your income. Check that you've reported your income, which can include not only wages but also things like investment income and jury duty pay. Remember that, in addition to income for which you receive a W-2 or 1099 form, things like tips and proceeds from sales activity on eBay also classify as taxable income.

Another example is alimony: Report this as income if you received it, since the IRS can match what you say (or don't say) against what's listed as a deduction by your former spouse.

3. Take care with your deductions. Big deductions can flag your return for possible audit. That doesn't mean you shouldn't take tax breaks that you're entitled to by law. But tax experts caution against making frivolous claims (one example would be trying to turn a hobby into a money-losing business). And hang onto key records so that, if questioned, you're ready to justify things like charitable gifts or business expenses.

The online tax-help firm WorldWideWeb Tax says claiming a home-office deduction boosts your chances of an audit. "Do it if it's substantial enough to make a tax difference," the firm advises. But "if the tax savings are minimal, then it may be wise not to claim the tax deduction at all."

4. Choose wisely if you hire a helper. If the IRS finds signs that a particular tax preparer is engaged in fraud, that can raise the chances of audits for anyone who uses that preparer. You can check the qualifications of the helper you hire: Is he or she a CPA? An enrolled agent? A preparer who has passed a competency exam? And you can see what's been said about them via the Better Business Bureau 

5. Offer explanations when appropriate. Sometimes you know your listing something that might look
unusual or suspect to the IRS. Adding an explanation doesn't guarantee you won't get audited, but it usually doesn't hurt, tax experts say.

In addition to formal audits, the IRS often sends notices to taxpayers regarding what the agency says are underpaid taxes. In some cases, you'll be able to see that the IRS caught you in a mistake. But don't jump to conclude that such notices are always correct. If you're not sure, you can grab your records (and maybe the professional help you've hired) and push back.

If you can't resolve the issue, the IRS's own office of Taxpayer Advocate Services might be able to help

How much do you know about taxes? Take the quiz.


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