Before You File Your 2007 Tax Return, Read This

Agency Sales, Mar 2008 by Daskal, Melvin H

Audit Information and Misinformation

Many taxpayers seem to believe that if the 1RS doesn't call them in for an audit within six months after their return is filed, they are home free. WRONG!

* The IRS has, at least, three years from the date your return was filed or due, whichever is later, to audit your return.

* If you omit more than 25% of the gross income from your return, the statute of limitations is raised to six years.

* There is a further exception in the case of fraud. If the IRS can allege and prove that fraud was committed - there is no statute of limitations.

* Pre-refund audits are almost never conducted unless the IRS knows or strongly suspects fraud.

* Receiving your refund check does not confer any immunity from audit.

* Realistically, if your return isn't opened for audit within 20 months, it probably never will be. (This is no IRS guarantee, just practical knowledge.)

* The individual states frequently have different statutes of limitations than the IRS. For example, in California, the regular statute of limitations is four years vs. the IRS' three years.

Easy Ways to Avoid the First IRS Audit Scan

* The most common error (believe it or not) is missing signatures. Have you and your spouse both signed and dated the tax return?

* Report all Form W-2 and Form 1099 income. If you feel that some 1099 reported income is not taxable: (a) report the income anyway; (b) on the next line subtract the same amount and add "see explanation"; (c) attach a full explanation as a footnote. But don't just ignore the Form 1099....

* If you receive a Form 1099-R (indicating a retirement plan distribution) and the entire amount was rolled over into another retirement account - report this transaction even though there is no taxable income. It clears the IRS computer that has this same information.

* File on time, including extensions. (Filing later with an approved or automatic extension does not increase your chances of an audit.) Filing after the final extended due date does.

* Try to avoid really huge refunds by adjusting your withholding and/or estimated tax payments in advance. TAXTIP: If it's too late, consider letting the IRS keep the refund - and immediately reduce your withholding and/or future estimates by the same amount. Couldn't hurt....

* Attach all required supporting schedules and forms to your return.

* Double check that the social security numbers of you, your spouse and dependent children are all correct. A common error....

* Report the name, address, and identification number of child-care providers.

* Be sure and provide the Social Security number of any person to whom you paid alimony.

* Attach Form 8283 if you gave total non-cash ("in kind") items worth more than $500 to charity.

* Report all sales of capital assets and be sure the selling price agrees with the amount reported by your broker or other financial institution to the IRS.

* Don't ignore the Alternative Minimum Tax (AMT) calculation if you are even possibly liable - and attach Form 6251 (we do in every case).

* Don't round off figures to the nearest $50 or $100.

* Be neat and legible. You can really irritate some IRS reviewer by sending a tax return he or she can barely read. It won't get you a "pass" - but it might get you an audit!

* Show the IRS how honest you are by reporting small amounts of income the IRS is unlikely to uncover. This particularly applies if you are filing a Schedule C - as well as elsewhere (e.g., jury duty fees).

Form W-2

It costs the employer nothing to check Box 15, Form W-2, if your employee possibly qualifies as a "statutory sales employee." However, it can be a big help to the employee in claiming unreimbursed business expenses (but if you are reimbursing all such expenses, there is no tax advantage to the employee). This classification permits the employee to deduct all unreimbursed business expenses on Schedule C, as if he/she was a self-employed individual. It saves the employee the 2% (of adjusted gross income) disallowance of those expenses (100% disallowed for the AMT calculations) and the necessity to claim itemized (rather than standard) tax deductions, among other advantages.

Schedule B Interest and Dividend Income

Year after year, many taxpayers cause needless problems for themselves, by reporting the correct amounts of dividends and interest, but not in a way that matches the IRS computer verification system. In Schedule B, Parts I and II, interest and dividends should be reported in the following manner. If you receive a broker's statement that lists total dividends and/or total interest - report just the name of the broker and only those totals. Instead, taxpayers continually list the individual stocks, bonds and funds - and the separate income from each. Please do as they ask and save yourself time and potential aggravation....

Similarly, report every Form 1099 for interest and dividends exactly as the names and amounts are indicated on each form. Whatever you do - don't lose any of those forms, or about 18 months later, you will surely receive an IRS computer form letter (CP-2000 or CP-2500 or CP-2501) with a bill for additional taxes, interest and penalties. At which point every taxpayer immediately screams one of the four standard excuses (yawn):