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Tax Audit Survival – Tax man cometh

tax audit cartoonTax audits are sort of like root canals – you go every year and hope you don’t have to go through one. The difference is that at least a root canal is only one day of pain, a tax audit can be weeks of pain. The good news is that most of us get through every tax season without having to do much except fill out our annual turbo tax forms as we file taxes online¬†and send them in.. Others, sadly, are not so lucky. So what happens if you do get picked in the IRS’ wonderful tax audit lottery? Well, we will take a look at that and at what happens if they decide you owe money on your taxes.

Tax audit prep – ALWAYS be prepared

The absolute number one rule of surviving a tax audit is a rule that hopefully you followed before the pain came. Keep track of your records. Collecting and organizing your records through the year will not only make it easier to prepare your taxes but in case of the audit, it will also allow much easier defense of yourself if the IRS picks you. Here are things you should be doing:

-keep at least three years’ worth of tax returns and records
-keep your online bank records if your bank doesn’t do it automatically
-keep your check stubs
-track your cost basis for property and investments
-keep your bills filed
-keep track of deductible items WHEN THEY HAPPEN

Who gets picked for a tax audit?

The IRS has been auditing more and more people every year, but most audits are directed at high income tax payers. I have an entire article on risks of being audited but I will go back over a few quickly:

-Big Charitable Deductions
-Someone rats you out
-Lots of business transactions
-Lots of itemized deductions
-Not reporting cash income (hello waiters)
-Inaccurate W-2 or 1099 Reporting
-Tax Shelter losses
-Home business expenses
-Prior audits (if there were problems)

Getting ready for a tax audit

If you get the lucky distinction of being chosen for a tax audit, its time to get audit prepared. The first thing to do is go back over every inch of your tax return and get VERY familiar with it. Once you have that straight its time to gather all of your records to support whichever items were questioned by the IRS. Before the actual examination you should figure out what kind of settlement you are looking for…the IRS likes to settle because it saves both parties headaches. If things go this far it might be in your best interest to get a tax attorney because they are knowledgeable and have dealt with it before. However, if you believe you are in the right and all of your records match it probably will not go that far…you may simply have to present your records.

What you should NOT do is offer any information not related to the IRS questions. This can potentially get you in trouble if they decide to audit OTHER items. Offer what is requested, nothing more.

What happens if I owe money after the tax audit is complete?

If you underpay, you may have one of these penalties:

20% Penalty – This is the “basic” penalty. It goes along with problems with property value, understating liability, messing up on your return, etc.

75% Penalty – If the IRS thinks you have been fraudulent in your claims this is where you get in big trouble. This deals with all of the “serious” tax offenses that aren’t jailable offenses.

Prison – Were you doing some tax evasion or other tax crimes? You can not only get massive fines, but even go to jail.

Ok so a tax audit is scary, but the truth is you can survive if you haven’t committed any serious crimes. The odds are good that you WILL pay some additional taxes so don’t get too discouraged if you owe more than you originally thought….but hey, better than jail. If you have organized records, you can get through it without too terrible a headache.

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