On your p's and q's: how to avoid an audit

Black Enterprise, Jan, 1996 by Terrence L. Johnson

'Tis the season for taxes. It's a time to visit your accountant, rummage through your closets and drawers for missing receipts and spend sleepless nights pondering ways to increase your tax return or cut the amount you owe Uncle Sam.

As you try to manipulate the system to reduce your tax bill, remember the repercussions of making careless errors or omissions: an audit by the Internal Revenue Service.

More than 1.2 million people were audited last year, and some $6.2 billion was recommended in taxes and penalties, says Don Roberts, a spokesman for the IRS in Washington.

The IRS recently put a stop to compliance auditing, but many accountants say you can still expect to get audited at least once or twice in your lifetime.

But don't fret--there are ways to reduce your chances of being audited. What's most important? Learning the guidelines. It's best to make your tax return simple, and always double-check your math. Answer every question on the IRS form. Moreover, report all income. Every year, IRS computers search through returns and match them with other documents from employers, financial institutions and the government to locate unreported income. If the computer finds any income you haven't reported, it automatically kicks out your return. The result: Your chances of an audit go up.

Believe it or not, certain items increase your chances of an audit. For whatever reason, home-based business deductions and self-employment income are sensitive areas and are more likely than anything else to trigger an audit, says Kevin Coleman, a certified public accountant in Culver City, Calif.

"A lot of home businesses generate income that is not traceable," he says. "And the IRS tends to believe people inflate their deductions. This is definitely a red-flag area that people should be aware of."

Other items that increase your chances of an audit, Coleman says, include dividend income, large medical deductions, entertainment or travel expenses related to business, business use of cars and owning significant rental properties.

Also, don't overstate your deductions. If your deduction is unusually high compared to your income, an IRS agent will check the item for accuracy. For example, if your charitable donation exceeds 10% of your adjusted gross income, you're likely to get audited, says Prentice Alexander, a certified public accountant in Dayton, Ohio.

"It's always best to pay your fair share of taxes," he says. "If you don't, you'll probably pay more after an audit." Meanwhile, taxpayers who have higher incomes are at a greater risk of being audited. In 1994, 2.94% of taxpayers who reported total incomes of $100,000 or more were audited, compared with 0.53% of those reporting income between $25,000 and $50,000, says Roberts of the IRS.

Still, don't be afraid to take every deduction and break entitled to you, says Coleman. Just remember to follow the IRS guidelines or to seek professional help.

"Don't pay too much taxes because you fear an audit," says Alexander. "The key is to be as accurate as possible and seek professional tax help if you need it."

Attach copies of receipts for large deductions. If you are claiming large deductions for unusual items, such as a loss because of a fire or high medical bill due to a sudden illness, attach a copy of receipts, canceled checks and insurance reports. This way, says Alexander, an IRS agent can verify your deductions without going over your entire tax return. The general consensus is to take great care in completing your tax return so as not to draw attention to yourself.