Tax season carries some upsides and downsides. On the one hand, it's a time when we can delight in preparing our tax returns as we merrily add up our deductions, smile at memories of dollars earned over the past year, and dream of tax credits we might be able to take. On the other hand, there's always the remote but troubling specter of an audit. If thoughts about audits are keeping you up at night, here are some things to know:
- According to a recent Associated Press article, the overall number of audits of individual taxpayers rose by 6% in 2006, to 1.3 million. That figure works out to roughly a 1-in-100 chance of being audited. Note, though, that many of those "audits" consisted of just a letter from the IRS asking for more information on a particular item. Keep in mind, too, that the IRS focuses its auditing practices on wealthier taxpayers -- about 1 in 16 taxpayers with income of at least $1 million was audited last year, a 33% increase from the previous year. Audits of those with income of $100,000 or more rose 18% from 2005, the highest figure in more than a decade.
- Factors that can increase your odds of being audited include unusual entries, items that suggest you might be hiding unreported income, unusually large deductions, and deductions for bad debt. But don't assume that you can avoid an audit just by making your return look typical: Many people get flagged for audits on a purely random basis as well.
- You can reduce your chances of being audited by including all your sources of income on your return. (Remember that many times, someone who paid you has reported that payment to the IRS, so the IRS will be cross-checking to make sure that you reported it, too. This can include dividend income and even alimony payments.) Also include details about your deductions. Itemize them. If you just lump a lot of things in a "miscellaneous" category, it could prompt questions. Feel free to attach a page explaining various items, if you think that will help.
- If an audit involves any work-related expense you claim as a deduction, you'll probably be expected to provide a letter from your employer stating that the expense was required as part of your employment, that it was for the convenience of your employer, and that your employer did not reimburse you for it. So when you include such expenses (perhaps travel costs, for example, or a home computer you had to get for work), make sure you'll be able to get the required documentation if you do need it.
- Finally, remember that there's help available. Individuals can call the IRS itself for help, at (800) 829-1040. Businesses can call (800) 829-4933. The IRS also staffs some Taxpayer Assistance Centers; click over to the IRS website to find the closest one to you. And there's always the Taxpayer Advocate, whom you can call at (877) 777-4778.
Longtime Fool contributor Selena Maranjian appreciates your feedback.