OK. Just one more thing then, I swear, no more tax advice!
But I'd be remiss if I didn't remind you about your potential to be audited by Uncle Sam.
Granted, the odds are quite slim. Of the whopping 130.1 million personal income tax returns filed in 2003, about 1 million, or 1%, were audited. That's according to RIA, a Thomson business providing tax information and software to tax professionals.
But just because the likelihood is low, that doesn't mean you won't be selected. First, know that audit selection has nothing to do with when you file your return. Whether you extend, amend or just file your return on time, we all have an equal shot of being chosen.
There are two kinds of IRS audits. There are correspondence audits, in which the IRS sends you a letter saying something is missing or incorrect. And then there are the actual face-to-face audits in which a revenue agent, tax auditor and tax compliance officer show up at your door. The good news is that of all the audits conducted last year, only 19.3% were of the face-to-face variety.
The process is based on random selection, says Jackie Perlman, a senior tax research analyst at H&R Block. So for the most part, there is no real rhyme or reason as to why your return is chosen for an audit. But there are some items that cause the IRS to do a double-take. Let's go over some of those now.
If you have big differences on your return from last year, that could be a reason for an IRS agent to go over your return. So if your charitable contributions went from $2,000 last year to $20,000 this year, you might be asked to verify that number.
If you're self-employed or run a farm, your return is generally a bit more interesting to the IRS. Mainly because there is a lot more room for, well, fudging. You have to document all your expenses and related income. And many times the IRS doesn't receive notification of this stuff like it does with an individual who works for a company.
For instance, an employee receives a W-2 that reports all his income, and Uncle Sam gets a copy of that. So he knows exactly what's going on. Self-employed people may be dealing with a business, and that is difficult for the IRS to track. So you may be asked to substantiate things.
But that doesn't mean that any or all of your deductions will be lost. It just might mean that you'll need to pony up some documentation to satisfy Uncle Sam's curiosity.
Be particularly careful about your home office deduction. Again, there is a lot of wiggle room here, so this is a hot item in the IRS offices. Be sure to read
Publication 587 -- Business Use of Your Home Office
to make sure you get everything right.
What If You Are Audited?
Don't panic. Again, it doesn't necessarily mean you did anything wrong. Itjust might mean that the IRS needs some documentation to satisfy its curiosity.
But the worst thing you can do is ignore it, says Perlman. Immediately contact the IRS agent who sent you the letter. Then do what you have to. Odds are good that you made a mistake. In that case, just send the money you owe and be done with it.
If you are selected for a face-to-face audit, the best thing you can do is get someone to represent you, says Perlman. So get a CPA, a tax attorney or an enrolled agent to help you. Let that professional deal with the IRS alone and negotiate your issues. Stay home! The last thing you need is to get all riled up and lose your temper in an IRS office. Let the pro do all the talking.
Note that if you don't have the money to hire a professional, go to the IRS Web site and check out the low-income-taxpayer clinics. There are attorneys out there who are willing to help people who are having problems with the IRS and will work out a fee with you based on what you can afford.
So in these last few hours of trying to get your return to look, well, "pretty," be sure that whatever you report has the documentation to support it.
Well, I hope we made your tax season a little less painful. It's over!
Now how about that cocktail?