Internal Revenue Service Audits

Pick your favorite scary movie. It could be the first Alien or something else. No matter how scary they were, nothing is scarier than an audit by the Internal Revenue Service.

If a person has a nightmare about finances, chances are that it is about Internal Revenue Service audits. However, if you are paying your taxes regularly and are honest about your filings there is no reason why you should be afraid of an audit. The Internal Revenue Service picks people with the help of a computer software program that zeros in on individuals that could have erred in filing their returns.

Normally, people who show deductions too high in relation to their income or tax items as erroneous are more likely to face a tax audit. Even so, only 1.5 to 2 percent of all tax filers are audited every year. The reason for the relatively low rate is the Internal Revenue Service simply does not have the staff to do the work. Think about it. There are hundreds of millions of tax returns filed each year!

One area the Internal Revenue Service does get riled up about is abusive business loss claims. The Internal Revenue Service looks for people who show losses in business over the years. If you are claiming business losses each year, it begs the question as to how you are staying in business. People that fudge in this area are really asking for trouble.

Moreover, if you have these things on you tax forms you may attract a tax audit:

1. Unreported taxable income is definitely going to attract audit. For example, interest earned.

2. You have complicated business expenses

3. You have rental expenses.

4. You have been audited earlier and proven guilty.

5, If you are a partner or shareholder in an audited firm.

6. You claim to donate heavily to charities.

7. Self-employed people have the greatest chance to claim erroneous deductions; hence, they are more likely to be audited.

8. Deductions under home office are also open for scrutiny more often.

9. If the mileage claimed is large enough to cause doubt.

10. If you have not filed alimony under taxable income.

11. Some informant has tipped the Internal Revenue Service off about you, to wit, a former spouse.

The good news is most Internal Revenue Service audits fall under the category of correspondence audits. In fact, I was audited last year. The Internal Revenue Service sent me a letter indicating I had not claimed dividends of $60 from a stock and owed a small amount in tax. I checked and found out something interesting. I apparently owned a stock and didn't know it. Turned out I had received shares in a merger, but had moved and never received them. I paid the tax and was done with it. By the way, I really do own such a poor performing stock.

To avoid Internal Revenue Service audits, you need to be able to substantiate your claims. If you are claiming something that is out of the ordinary, make sure you have receipts, paperwork and so on to support it. A good accountant helps as well.

Richard A. Chapo is with BusinessTaxRecovery.com - providing information on taxes.