Audits of the Internal Revenue Service

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

If a person has a nightmare about finances, it is most likely Internal Revenue Service audits. However, if you pay your taxes regularly and are honest about your filings, there’s no reason you should fear an audit. The Internal Revenue Service screens people with the help of a computer program that zeroes in on people who might have made a mistake when filing their returns.

Typically, people who show deductions that are too high relative to their income or tax items as wrong are more likely to face a tax audit. Still, only 1.5 to 2 percent of all tax filers are audited each year. The reason for the relatively low rate is that the Internal Revenue Service simply doesn’t have the staff to do the job. Think about it. There are hundreds of millions of tax returns filed each year!

One area the Internal Revenue Service gets angry about is abusive business loss claims. The Internal Revenue Service looks for people who show business losses over the years. If you claim business losses every year, the question arises as to how you stay in business. People beating around the bush in this area are really asking for trouble.

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

1. Unreported taxable income will definitely attract an audit. For example, interest earned.

2. You have complicated business expenses

3. You have rental expenses.

4. Has been previously audited and proven guilty.

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

6. You claim to make large donations to charities.

7. Self-employed workers are most likely to claim erroneous deductions; therefore, they are more likely to be audited.

8. Deductions under the Home Office are also open to scrutiny more often.

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

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

11. Some reports have told the Internal Revenue Service about you, namely a former spouse.

The good news is that 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 stating that I had not claimed a $60 dividend from a stock and that I owed a small amount in taxes. I checked and discovered something interesting. Apparently he owned a stock and didn’t know it. It turned out that I had received shares in a merger, but I moved and never received them. I paid the tax and I was done. By the way, I really own such underperforming stocks.

To avoid Internal Revenue Service audits, you must be able to substantiate your claims. If you are claiming something that is out of the ordinary, make sure you have receipts, documents, etc. to back it up. A good accountant also helps.