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Audit-Proof Your Tax Return

http://www.fool.com/personal-finance/taxes/audit-proof-your-tax-return.aspx

Roy Lewis
March 24, 2008

Is there really such a thing as an audit-proof tax return? A way of preparing your return to guarantee that you won't be subject to an audit? Of course not. But there certainly are ways to minimize your risk.

You don't want to thumb your nose at Uncle Sam, thinking that an audit won't happen to you. It just might, and if it does, you should be prepared. But what can you do to make your tax return less susceptible to the IRS' eagle eyes? Here are seven suggested strategies.

Be neat!
Consider preparing your tax return by computer. A neatly prepared, computer-generated return looks much better to the IRS staffer (called a "classifier") who will decide whether to audit your return. Virtually all reputable tax pros now complete their returns using computers, and there are a number of really good do-it-yourself computer programs for PCs and Macs alike. (For my do-it-yourself friends, I recommend TurboTax.) Some websites even allow you to securely complete your tax return from the comfort of your Web browser.

If you're unable to use a computer to prepare your return, at least print clearly and carefully. Don't decide to get your revenge on the IRS by preparing your return with a red crayon. A messy return -- cross-outs, sloppy handwriting, and smudges -- is like hanging a sign on your return that says, "Audit me!" It might also give the IRS the impression that you are careless and disorganized.

Remember that the IRS has stepped up its audit enforcement in recent years. The IRS believes that the taxpaying public has gotten an audit-free ride for years -- and that ride is now over. While it's still unlikely that you will be audited, the odds have increased substantially.

Be accurate!
The only thing worse than a messy return is an incorrect one. By "correct," I mean that all of your numbers add and subtract accurately. This is another reason to prepare your return by computer, since you don't need to worry about a computer program flubbing any of the math.

Remember that your tax return will be loaded into the IRS computers, and those computers will check your return for math errors. If your return states that 2 + 2 = 5, they might start wondering about some of your other numbers. Don't give them a chance. Double-check your numbers before you mail your return.

Watch Schedule C!
Avoid filing an income tax return with a Schedule C (Profit or Loss for Business) that reports a net loss from a small-business venture. This is especially true when your main source of income comes from W-2 wages. IRS auditors go after these returns like politicians go after money. Why? In order for these business losses to stand up, you must pass both the "passive loss" and "hobby loss" rules. You aren't familiar with those rules? Neither are most taxpayers, and the IRS knows it.

Document deductions!
If you claim large deductions for unusual items, such as losses because of earthquake, flood, or fire, attach documentary proof to the back of your tax return. Copies of repair receipts, canceled checks, insurance reports, and pictures are always a good idea. This won't stop the IRS computer from flagging your return, but the documents should catch the attention of the IRS classifier. If he or she thinks your documentation looks reasonable, you probably won't get audited.