Enzo Paredes On: Avoiding An Audit On Your Taxes (Part 1 of 2)

auditSometimes I see a story which reminds me of the very reasons why I started doing what I do, here at this Chatsworth, CA tax preparation business.

Not every Chatsworth, CA tax professional is the same — some of us got into this business simply because we were pretty darn good at math, and, well, accounting is a logical endpoint. (Though if these programs were REALLY about preparing their grads, there would be entire classes devoted to filling out and navigating federal forms!)

Others started in this business because they started doing tax returns on behalf of friends and family … and things just sort of blossomed from there into a real Chatsworth, CA tax business.

And then there are stories like this one: http://www.freep.com/article/20130903/NEWS01/309030014/Detroit-city-income-tax-fight

It’s a pretty harrowing read, and it reminds me of exactly why I love doing what I do. A kind-hearted woman decides to help out her struggling hometown of Detroit, MI by donating her $500 2011 tax refund check to the city … and for some reason, the city then decided to audit her entire financial history, and slapped her with a $5,296 “overdue” tax bill as a thank you.

I know — it’s Detroit. But do NOT think that just because this particular municipality is more visibly dysfunctional than others that you are immune from such an ordeal. More and more cities will be looking into every corner possible for additional cash, and not just those who are facing bankruptcy (like Detroit).

But here’s the key bit:

“I work too hard for every little bit of my money I make to just give it to you [the offending tax department] because you’re being lazy,” she said.
Is that true for you?

If so, it’s a good idea that you:

A) Make sure you have a dogged tax professional on your side (ahem: Enzo Paredes), in case any similar fight comes your way in 2013/14, and …

B) Read what I have to say this week.

Enzo Paredes On: Avoiding An Audit On Your Taxes (Part 1 of 2)
“Sometimes adversity is what you need to face in order to become successful.”  – Zig Ziglar

The good news for the woman cited in the article above: she is an accountant, and had kept copies of all of her paperwork. I wrote three months ago about my recordkeeping rules of thumb, so I won’t re-hash those today.

Instead, I want to speak to those here in the Chatsworth, CA region who are filing individual extension returns (due October 15th) or corporate, trust, and partnership extension returns (due September 16th), and are NOT having my Chatsworth, CA tax preparation team and I handle things on your behalf.

Because this is the kind of stuff which will get you audited…

1. Making “indefensible” claims
There are so many old wives’ tales saying that certain items trigger an audit: home office deductions, passive losses, schedule C (sole proprietorship) activities, etc. But you really can’t predict the trigger (and you can drive yourself crazy trying), but you *can* adopt the “be reasonable” mantra about every item on your return (with our help, of course), including these. So if you don’t have a decent claim for a home office, we’ll help you not to claim it. If your money-losing sole proprietorship is really more a fun hobby, treat it as such.

Look — don’t be scared to take deductions and losses you’re entitled to, but don’t take tax positions you aren’t comfortable defending. If you take reasonable tax positions, you’ll likely find you won’t end up needing to defend them. And if you do face an audit, it will likely be far easier.

2. When things don’t add up
This seems like it should go without saying, but make sure you add, subtract and multiply accurately. Check your numbers through each step and do some simple math checks when you finish. If you do make a math mistake, you are likely to get a math correction notice from the IRS. This isn’t an audit. But our goal is to minimize your interaction with the IRS bureaucracy, which, ah … isn’t known for the best mail handling practices. (See above!)

3. Leaving out a 1099 or other paperwork
This can be confusing, because the Form 1099 comes in many varieties, including 1099-INT for interest, 1099-DIV for dividends, 1099-G for tax refunds, 1099-R for pensions and 1099-MISC for miscellaneous income. These forms are sent by payers of such funds to both you and the IRS.

So regardless of how many 1099s you received over the winter, make sure they all are accounted for on your return. There are also Forms 1098 which lenders send (to you and the IRS) recording how much interest you paid. The IRS matches your return against the 1098s and 1099s. So one sure way to guarantee an IRS query is to fail to account for something! If a Form 1099 is wrong — say it reports more income than you had–you can explain or deduct it on the return, but you need to first report it.

4. Do not “over-report”
I’m not talking about under-reporting income, or holding necessary information back. But you’d be surprised how many professionals and amateurs alike try to submit too much *supporting* information. True, if your return is complex, you may need to add explanations or disclosures in footnotes. Be concise, truthful and accurate, but don’t provide copies of sales agreements, settlement agreements, bank statements, etc., unless you are later asked to by the IRS.

Disclosures can be made on regular paper or special IRS forms. A Form 8275 “Disclosure Statement” on plain paper can be used any time you need to disclose something that can’t be adequately disclosed on the forms. Form 8275-R “Regulation Disclosure Statement,” is for disclosing positions that are contrary to IRS Regulations or other authority. You shouldn’t be filing a Form 8275-R — or taking a tax return position that would require it — without professional help.

Frankly, though, any disclosure statement should be checked with someone who can take you by the hand and ensure it’s done properly (ahem).

I’m in your corner!


Enzo Paredes

Enzo Paredes On: Avoiding An Audit On Your Taxes (Part 1 of 2)