How to Avoid a Tax Audit

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"I've been audited six times and never paid a penny!" crows Steve, a Manhattan author who, for reasons that will soon be obvious, doesn't want his full name used.

Steve is proud to have gone toe to toe with the IRS six times and, six times, emerged unscathed. While that's sweet satisfaction, avoiding being audited in the first place is sweeter still.

Tax professionals and the IRS agree there are simple steps every filer can take to reduce the odds of being audited. 'Reduce,' though, does not mean eliminate: Some filers are audited entirely at random, so there's no way you can cut your odds to zero.

Report everything you're supposed to, no matter how piddling the amount. So says CPA Michael Schulman, third-generation owner of Schulman CPA, a full service New York City tax, accounting and auditing firm. The IRS automatically gets duplicate copies of all the forms that you receive -- your W2, your 1099, etc. They cross-check them against your return.

"They match everything," warns Schulman. "That $11 you got as interest on some old bank account? Report it."

It's not the amount that matters. It's your failure to file a complete set of documents. The discrepancy, when discovered, will cause you to receive an automatic audit, in the form of a letter from the IRS asking you to explain. You don't' want to call attention to yourself. You want to pass without friction through the system.

Meet filing deadlines. Again, you don't want to do anything to suggest you're being anything less than 100% complaint. You want to make yourself in every way to "look like a normal taxpayer," Schulman says. Remember that even if you file for an extension, by April 15 you still must pay any taxes owed. Not sure how much you owe? Can't afford to pay the full amount? Experts advise you to pay something, even a token amount, as a gesture of good faith. Some preparers recommend you file as late as possible, on the theory that, in a given tax year, most returns that get audited are selected prior to October 15, the last extension deadline.

Don't be a pig. "People have a tendency to be too generous with their deductions," says Schulman. "Only deduct what you're entitled to — your unreimbursed business expenses, for instance." Unsure how much is too much? Some consumer tax-prep software comes with a feature that automatically flags amounts that fall outside IRS norms. If you're tempted to claim a deduction for a home office but unsure whether or not you qualify, consult IRS Publication 587.

Be prepared to document all expenses and to prove how they relate to your business. Steve, the author and six-time audit veteran, legitimately wrote off his research costs for a non-fiction book, but without yet having any royalties to show from the project. He was, however, able to show the IRS that he was a published author and had earned royalties before. His receipt-keeping and record-taking were impeccable.

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