“The past does not define you, the present does.”
– Jillian Michaels

I hope your weekend went well–our family has been enjoying the Olympics, and, in particular, many of the stories which go with it.

If you’ve paid any attention, you probably heard about American, Lindsey Vonn. She’s known as perhaps the world’s top female skier having dominated the World Cup the last couple years–but she entered these Olympics with a serious shin injury which left her hopes seriously dimmed.

Well, in her first event, she came through.

And the sheer explosion of joy when she saw her time…well, it will bring tears to your eyes. Watch it here:
http://www.nbcolympics.com/video/assetid=04fb8dfd-11ac-413d-88ad-efb130f93ebd.html#emotional+victory

It’s stories like this which always make the Olympics compelling, in my opinion–the story of lives in pursuit of an audacious goal.

Now…there’s stories like this, and, of course, the stories of our own lives which capture most of our attention. And here’s a BAD chapter to live through: an IRS audit.

We’ve dealt with this for clients in the past, and it’s never fun. So, with that in mind, I’ve put together some excellent ways to MINIMIZE your chances of getting audited. Unfortunately, I can’t *guarantee* that you would never get audited…but following this advice will significantly reduce your chances.

Read on, and leave your feedback!

“Real World” Personal Strategy
8 Ways To Keep The IRS Audit-Hounds at Bay

1. Don’t make 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. Make sure it all adds 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.

3. Don’t miss a 1099

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 receive, 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. Report “just enough”

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).

5. Don’t fight what you don’t need to fight

Here’s where some clients have gotten in trouble in the past, despite our admonitions: If you take reasonable tax positions, and complete your return accurately, checking your math, why should you pay a bill if the IRS sends you one? Frankly, it’s a matter of practicality (and wisdom) rather than principle. It just doesn’t pay to fight with the IRS on small matters. So don’t get into the bureaucratic system and risk bigger problems for a few dollars. Just pay it and move on.

6. Avoid minor amendments

Here’s the reverse situation of my previous point: amended returns are reviewed much more regularly than initial returns. So if you forgot a deduction or otherwise think you can get a small amount back by amending, think twice before amending your return (i.e.–consult with a pro). Consider whether you might have bigger problems if other matters on your return, unrelated to the amendment, are reviewed. Yes, you can win a battle…and lose a larger one.

7. Don’t ask for cash

Perhaps you’ve received a notice that you are entitled to a refund. Well, you might consider applying it to your next year’s tax payments, rather than asking for the refund in cash. If you have a big refund, you’ll simply have a lower “profile” to the computers and to the bureaucrats if you file a return applying a whopping refund to estimated tax payments for the current or future years. This logic applies to both initial returns and to amended ones.

8. Go with a pro

Yes, this is a bit self-serving–but I’ll also make a “damaging admission” here: some tax professionals argue that a return prepared by a professional is less likely to be audited. However the facts are that there’s little reliable data to support it. That being said, having a professional prepare your return–or at least advise on anything quirky–is simply a wise investment.

So to absolutely ensure that whatever happens, you’ll have someone at your side–give us a call!

And a last word: No matter how careful you are, there’s no way to guarantee you’ll never have a tax controversy. Sometimes your number just comes up. But when your number is called…make sure you aren’t alone.

I hope this helps.