To paraphrase Jim Croce:
You don't tug on superman's cape
Don't spit into the wind
You don't pull the mask off that old lone ranger
And you don’t mess around with the IRS
At least, that’s how Al Capone would have sang it. The Department of Education, on the other hand… Go nuts. They’ve never educated a single person. And they have never put anyone in prison. The IRS has routinely done both. They have the power to give you an education in finance and consequences that you never wanted, and they can take you from your office directly to the penn without passing go, or collecting $200. These reasons should encourage you to avoid IRS attention in the form of an audit after tax season. Here’s how:
Give Yourself a Tax Education Before the IRS Gives You One
Before you even get to the EZ form, there are a thousand and one little things you need to know. I assure you; the things you don’t know about taxes far outweigh the things you do. Trouble lies in the vast area of things you don’t know. While an error of a few dollars is unlikely to trigger an audit, the IRS has no sense of humor–at least not one of which they are aware. They have nearly unlimited resources. And they have very little in terms of a sense of proportion. A little knowledge goes a long ways towards keeping their gaze away from you.
For example, a lot of people believe they can claim however many allowances or deductions on their W-4s as they like. This isn't necessarily so, according to Natalie Cooper, who is in the field and familiar with the concept. She writes that “the deductions and credits that you qualify for each year may change based on your own situation and changes in tax code, so you should avoid simply copying the number of allowances that you were using from the previous year.” She goes on to point out that, if you are married, the number you can claim will change based on the number your spouse claims on his or her W-4.
Learn how your various forms and details are supposed to work and be calculated before you start plugging numbers into your 1040. The last thing you need is to be audited because you and your spouse accidentally claimed each other as dependents when turning in your annual W-4!
Let a Professional Do the Heavy Lifting
Since we’ve already established that you don’t know your way around the tax code, why not enlist someone who does? They will know right away if you are at risk of an audit. Anyone who is in the high-risk category should have a professional do their taxes for them. No need to inflict yourself with this slide show from Forbes.
Here are some of the risk factors therein:
- Make a lot of money.
- Fail to mention off-shore accounts.
- Be a tax protester.
- Claim huge charitable contributions.
- Omit income reported by someone else.
- Take too many home-based business loans.
This list goes on. But you get the idea. Any deviation from the standard will get you noticed. As the Japanese proverb goes: The nail that stands out gets hammered. There are a lot of risk factor lists out there. They all will have income near the top. Other factors aside, when you make a lot of money, you stand a good chance of being audited. Don’t fool around. Have a professional do your taxes for you.
In acknowledgement of the fact that there is no airtight method of avoiding an audit, I should say a few words about what to do in the event you find yourself in that situation:
- Be prepared.
- Get help.
- Think compromise.
- Record it.
- Appeal it.
Part of your preparation will be to immediately follow up and find out exactly what is at issue. The audit letter may not be very clear or forthcoming. Know exactly what you are dealing with. Hire a professional who specializes in audits. Understand that you are not dealing in absolutes. Even with the IRS, there is room for compromise and negotiation. If you don’t like the outcome, you can always appeal it.
While receiving an audit letter is not the end of the world, it is the start of a very bad day. Take all reasonable steps to avoid it altogether by educating yourself and letting a professional do the heavy lifting. Oh, and try not to make too much money.