What's it all about? In an audit, the IRS contacts the taxpayer to verify some of the information contained in a filed tax return. The process usually involves a careful examination of the return.
The IRS is becoming more active in enforcement actions. In 2007, the IRS audited nearly 1.4 million individual tax returns, the highest rate since 1998. Audits of businesses jumped 14 percent, to just under 60,000.
The IRS is trying to reduce the tax gap, the difference between taxes owed and taxes actually paid, which the agency estimates is roughly $290 billion.
To avoid being targeted for an audit, the easiest remedy is to turn in a tax return that is as accurate, neat and as well-organized as possible. If your math is wrong or some details are missing, you will find yourself contacted by the IRS.
You may not end up being audited, but it's best if your return doesn't attract added scrutiny.
To that end, don't take a deduction for a charitable donation unless you have documentation to prove you made it, such as a confirmation letter from the charity. Your return may be scrutinized if you have donated a great deal — more than 10 percent of your income, as a ballpark figure — or if you have given away a big-ticket item, such as a car.
You must obtain an appraisal for a non-cash item worth more than $5,000. There's no reason you have to stop being charitable, but be sure to document what you have done.
Home office deduction? This is one that raises red flags at the IRS and may bring on considerable scrutiny.
Again, keep detailed records of your expenses, particularly those that the IRS may believe are really personal items that you are trying to claim as expenses incurred during business transactions.
You may also be called on to verify the necessity of a home office.
For the Record
In addition to charitable contributions and home office expenses, travel and entertainment deductions draw a considerable amount of extra attention.
With that in mind, be sure to keep records of the expenses and the purpose of your business trip.
For entertainment, in addition to keeping the receipt, make notes of who you entertained, where you went, how much you paid, and what was discussed. Documentation won't prevent an audit, but it will help you make your case if you are audited.
If you are contacted about an audit, CPAs advise that you try not to panic. You are not going on trial. You are simply being asked to back up some of the claims you made on your tax return.
Remain calm and cooperative in your dealings with the IRS. And it's a good idea to contact your local CPA for advice and assistance in case you are audited.