As we rapidly approach the end of tax season, it is inevitable that many people have questions about audits. Even if someone has never had to undergo one, it feels like a big, scary thing that everyone wants to avoid. And although there is no way to ensure that you will be forever ‘audit-proof,’ there steps you can take to remain confident your return will hold up to an audit.
The first step here is to be honest. If you report all your income and only claim legitimate deductions, then you have followed the rules and there is nothing to catch you on. The next step, though, is to make sure that you can document all of this, too. It is one thing to have legitimate deductions, it is another to have the receipts and/or paperwork that back it up. Just know as a rule, anything that you cannot back up will be disallowed by an auditor.
I am not going to be so naïve as to pretend that I don’t know people are fudging some numbers on their returns. I even believe that a lot of fudging is genuine as in – “I made this purchase but don’t have the receipt” or “I made a donation in cash at an event.” That is where the deductions can be legitimate but cannot be proven. At that point, you are kind of playing the audit lottery, assuming you’ll slide under the radar and not be called out to prove the numbers.
And of course, an overwhelming majority of tax returns are not audited, so much of this passes the without special notice. A lot of this is done with smaller numbers, which makes it easier to slip by. Once numbers start to get beyond the norm, though, that is when they can start to raise some flags. And if you want a little more view into that process, you can read this recent article from CNBC.
Before I leave here, though, I want to mention the income side of the equation a little more. For sure, deductions can easily be transactions that take place outside the purview of tax forms, which is where a lot of that fudging exists. The money you have earned, though, is essentially already reported to the IRS. If you receive a 1099 for money you didn’t realize was going to be taxed, a form also went to the IRS. It is going to be more difficult to get away with thinking you can simply not report that to avoid the taxes.
In closing, remember the best way to feel comfortable when thinking about an audit is to do things the right way when you file your return. And if you need any help with that, please do not hesitate to contact us.
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