Audits - Be Prepared

In a previous post we looked at the likely-hood of any one taxpayer facing an audit. While the odds are low, every US taxpayer should be prepared for the possibility of an IRS audit.

Anyone that claims deductions beyond the standard deductions should be prepared to defend their tax return. Self-employed worker, small business owners, anyone claiming investment losses or virtually any other financial circumstance beyond the usual salary minus standard deduction scenario should be prepared.

Taking deductions or claiming that certain expenditures are business expenses reduce the total taxes owed. The IRS expects make taxpayers to make such claims. Deciding what is a legitimate deduction or business expense is left largely up to the taxpayer and her advisors. Deciding whether to accept them is up to the IRS and, in the case of an audit, the auditing agent. Therefore surviving an audit depends on being prepared to defend the deductions taken.

Good record keeping is the key to being prepared. Save all receipts and keep them in an orderly way so that if an audit ever happens locating them will be easy. Keep records of all transactions that affect each year’s taxes – both income and deductions. Make sure that all transactions are clear, traceable and can be explained. Maintaining honest and straightforward financial records will offer most taxpayers the ability to survive an audit.