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Guilty until proven innocent – avoiding a tax audit

Ah yes, its tax time again. Time to look back on your W2s and become depressed at the 4-6 digit income you have provided the federal government to build bridges to nowhere. Ok ok all cynicism aside, we all have to go through the tax season, which ranges anywhere from refund party to, to use my friend as an example “Oh God, Oh God, I owe double social security because I am contractor….I DIDN’T BUDGET FOR THAT” sort of panic. (Actually hes not panicking at all, but its great for dramatic effect)

Ok so the most ominous of all things tax is the little word we call “audit.”

What IS an audit exactly?
It is where the government comes to investigate to determine if the information you gave to the IRS on your tax return is correct – which results in them telling you whether the proper amount of tax was paid. Oh except that there are a few details, such as, if they decide that you were purposely avoiding paying some taxes, you can go to jail. Thats right buddy, jail. And (un)fortunately (for the taxpayer), the IRS works the opposite of our legal system. You are guilty until proven innocent. Thats right my friend, the burden of proof is on you, the taxpayer if the government comes a knockin. Some audits are fairly routine where they ask you to just clarify a few things via mail. Then there are other audits where you go to a government office, and still others where the government COMES TO YOUR HOME. Awesome.

Ok now the bad news is that there is no way to completely avoid an audit…some returns are chosen at random. However most are chosen because of certain triggers and red flags that the IRS uses to determine if you are stealing your money from their pockets.

1) Be neat or better yet use something like turbotax
Appearance really does matter. One of the worst things you can do is turn in a handwritten return and you want it to at least look like someone who has a clue what they are doing. I really really really encourage the use of tax prep software, it completely eliminates math mistakes….which happens to be the #1 thing the IRS looks at.

2) Report all income
No Im not referring to the garage sale you had last Saturday where you sold that old sofa for $5 and some old 80s abba records for 10 cents. Any income that you have done as a contractor for a business, as an employee, from capital gains (stocks etc) has to be reported. I am not just speaking ethically because businesses report to the IRS as well and so when they send you that tax form in the mail, its not for nothin….the IRS has it too. This is ESPECIALLY important if you are in a career that is paid primarily in cash. Fair or not, the IRS loves auditing cash earners because they assume we all cheat.

3) Make sure your income matches your lifestyle
If are reporting that you earn $30,000.00 but you live in beverly hills and drive a ferrari, you are probably going to have trouble. The IRS can and WILL reference your income against your zip code. Kind of scary, huh? Also if you drop income substantially from year one to year two it could also get flagged.

4) Be VERY careful about claiming business expenses
Business expenses and home office deductions WILL raise the IRS interest. Huge deductions and loss write offs will have Joe Auditor showin up at your door in no time. Oh and those emails going around saying “you would never know it but you can deduct…” are not true. Not only are they not true but the IRS looks for them. So no you can’t deduct that BA suit or dress you bought just because you wore it to work. My favorite is probably that if you work from home you can deduct your HOUSE. Yeah, no.

5) Make less money
The more you make, the more likely you are to be audited. But hey, triple my income, Ill take my chances.

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