Written by Tax Controversy Attorney Shad Brown
As an Arizona tax attorney, one of the questions I get asked most often is, “how do I avoid an IRS audit?” While there is no sure fire way to avoid being audited, there are steps that can be taken to decrease the odds that an audit will occur.
1) Be wary of who prepares your tax return
Most of us have heard the following statement, or a variation of it, from someone. “You need to use my tax return preparer. I used to get small tax refunds but with my new preparer I get huge refunds!” Who doesn’t want to get more money back when they file their tax return? This is such a great sales pitch. However, the reality is that for most people, your tax return is not that complicated and the amount of your refund should not change from preparer to preparer. There is not a secret tax code provision that only a handful of preparers know about. If it sounds too good to be true it likely is. The tax return preparer that gets you great refunds that no one else can is likely filing a false return on your behalf.
What your friend, and the shady tax return preparer, will not tell you is that the IRS pursues tax preparers every year. Each year, the IRS compiles a list of return preparers suspected of filing false tax returns. Undercover IRS agents visit these preparers seeking to catch them in the act of filing a false tax return. When they do catch a bad return preparer, the IRS will audit every client of the return preparer. You may not get caught this year but that doesn’t mean the hammer won’t fall soon. When it falls there will likely be interest and penalties associated with it. Avoid the hassle and use a competent return preparer and reduce the chances that you will be audited.
2) Does your return make sense?
I have many clients who have come to meet with me after finding out that they are under audit. Most want to know how they were selected for audit. Before I answer this question I always take a quick glance at the client’s tax return. It still surprises me when I see figures similar to the following:
Gross Income – $60,000
Mortgage Interest Paid – $25,000
Charitable Deductions – $15,000
Health Care Expenses – $8,000
Basic arithmetic tells us that after the three deducted expenses of mortgage interest, charitable contribution and health care expenses are deducted, you only have $12,000 of gross income to pay all of your remaining expenses for the year. This would include food, utilities, gas, vehicle maintenance, entertainment, to name a few. It is easy to see that this does not add up. The IRS has computers that compare these numbers and if the amount left after your known expenses is not enough to live on you are likely to be audited. Before you file your tax return give it a common sense reading. If it doesn’t add up, you are probably missing something.
3) Report your income correctly and avoid filing an amended return
I will admit that I have fallen victim to this trap. There have been years that, in my haste to file my income tax return, I have filed my return before I have received all of my Forms 1099 and W-2. Invariably, when I act in such haste, my own meticulous record keeping fails me and I omit some obscure payment that I did not remember receiving. When this happens, you will be faced with deciding between the lesser of two evils.
The first evil is that the IRS computers will match the income reported on your income tax return with the income that was reported to them on your behalf. If the number you reported is not greater or equal to the number reported to the IRS, you will be audited (please note that it is possible, though highly unlikely, that the amount omitted is so inconsequential that it will not generate any more tax and will not trigger an audit). The second evil is that when you file an amended tax return to report the income you failed to include in your original return, it will not be processed electronically. Instead, the return will be examined by a human being. I refer to this as a soft audit. This greatly increases the odds that you will be selected for a full audited. To be clear, the greater evil is being audited when your return is false. It is always better to correct a return you know is incorrect and face being audited for a return you know is accurate. The lesson I leave with you is to be patient. Take the extra time to ensure that you have received on necessary forms to complete your tax return and that your return accurately reports all income you received. You should only file an amended return when necessary.
If you do find yourself under audit, do not fear. You do not have to confront the IRS alone. The trusted tax attorneys of the Dana Law Firm are your IRS and Tax experts and can guide you through the process as smoothly as possible.