More Tips for Avoiding an Audit -- Continued
3: File on Time
As with many things IRS-related, there are differing opinions about whether you're more likely to be audited if you file on time or if you file an extension. Many believe that it is better to file an extension and ensure you get your tax return right the first time than to file on time and file an amended return at a later date. Amended returns go through a screening process and are audited more often than original returns.
If you file an extension, keep in mind that it is just a filing extension, not a payment extension. If you believe you owe money, you must pay it on April 15 -- or incur interest and late fees. If you can't pay everything you believe you owe, pay something. Doing so will save you on late fees and indicate a good-faith effort.
Bottom line, file on time if you can, but if filing on time means you may have to file an amended return later, file an extension and send in your payment with the extension, using IRS Form 4868.
2: Keep Good Records
Obviously, keeping good records won't keep you from being audited -- unless you believe in the law of inverse proportions, which says that the more prepared you are for something, the less likely it is to happen. However, an audit is really just a request for more information or explanation, so if you are prepared with the documentation to back up every deduction, claim, credit, dotted i and crossed t, you should sail through the audit process with little harm.
Remember, keep your records for a minimum of three years, keeping in mind that there is no statute of limitations for fraud, which means the IRS can ask for records going back to the stone age if they suspect you're up to no good.
1: Prepare for the Unexpected
This list has covered many of the most common things the IRS looks for when auditing returns. However, there are a few other reasons you may be audited:
- Outside the norm: If your return is outside "normal" when compared to similar returns, you may be audited. For example, if you own a home in an expensive area of the country, have a houseful of kids and claim an income of $10,000 when most of your neighbors make $100,000 or more, you may be audited.
- Random selection: Some returns are audited based only on random selection, not because there is anything wrong or outside the norm on the returns.
- Matching: When payer and payee returns don't match, such as the information from a W-2 or a claim of alimony, you may be audited.
- Associated audits: If business partners or other associates you have tax issues in common with are selected for audit, you may be audited as well.
While there may be nothing you can do to prepare for these audit situations, your best defense is to hold on to backup documentation for everything.