Who doesn't dread opening a letter from the Internal Revenue Service ? If you know it's not a refund check, it probably means an audit. Even if you're the most honest taxpayer in the country, you don't want to be in a disagreement with the IRS.
The IRS is getting tougher. In 2007, the number of individual returns that were audited increased by 7% to 1,384,563 -- the largest number since 1998. Wealthy Americans, not surprisingly, felt much of that change. Audits of individuals with incomes over $200,000 reached 113,105 last year -- up a full 29% from the previous year. Audits of people who reported more than $100,000 in income increased nearly 14%. That's what makes the latest announcement from TurboTax so appealing. This year, the popular software program has a new feature called the "Audit Risk Meter," which is designed to help you lessen the chance of your return being chosen for this extra scrutiny. Of course, the IRS doesn't announce the key items that it uses to choose a tax return for an audit. But using the information from the many tax professionals who create its software, TurboTax ( INTU) has identified many deductions and other common reasons that trigger an IRS audit.
Preventing an Audit
The program flags items -- or combinations of deductions -- that might be likely to provoke an audit. It gives an explanation of why this is such a hot button and advises you to consider alternatives or to keep backup data to justify the deduction. The audit risk meter shows you whether you're in the red zone, and more likely to be audited, or in the green, so you can heave a sigh of relief, sign your return and mail it or file electronically. Some key items that trigger audits:
Child tax credit: Just claiming your child as a dependent will trigger a match if that social security number comes up on the other parent's return. The second return to be filed with that number is called for an automatic audit!
Business deductions higher than income: If you've started a small business on the side, it's quite possible that the deductions will be larger than your income. The program reminds you what documentation is required, since the IRS is likely to take a closer look.
You own a rental property: The popup reminds you that if you stayed in your rental property for more than 14 days during the year, or a total of more than 10 percent of the days the property was rented, it will be considered a vacation home. Keep documentation.
Dealing With an Audit
You probably use tax software because you don't want to pay a professional to do your return. Then who do you turn to when that ominous IRS letter arrives? TurboTax deals with that issue, too, with a downloadable feature called Audit Support Center, which you'll store on your computer, just in case, as you prepare your tax return. It's specifically designed to take the panic out of responding to that dreaded summons. The Audit Support Center recognizes that when you open the IRS letter, your mind goes into shock. So on the first page you see a picture of the four different IRS sample letters you might receive, representing the four basic types of audits. Then as you click on the form that represents the document you're holding in your shaky hand, it guides you on the appropriate response.
Automated Adjustment Notice. This is a computer-generated notice, usually fairly easy to deal with using the prepared response suggestions that pop up on your screen.
Correspondence Audit: These letters are used to verify straightforward issues, such as a question regarding a stock loss. Again, templates in the program show you how to respond appropriately.
Office Audit: These take place at an IRS office -- a face-to-face meeting with an IRS auditor.
Field Audit: they're coming to see you!
In this case, a picture is worth a thousand words, or fears. Once you recognize the form, the software asks you a series of questions to help you respond. It even gives you templates for letters, showing you what personal information to insert, and where to mail your response. While other programs such as TaxCut , which offers free audit support by H&R Block ( HRB) tax professionals if you e-file, only TurboTax offers the prevention service through its Audit Risk Meter. (If you're truly IRS-phobic, TurboTax offers an additional service called Audit Defense. For $40 an enrolled agent professional will deal with the audit on your behalf, and represent you at an audit so you never personally have to talk to the IRS.) The odds of getting audited are still pretty long. The IRS says only about 1% of all returns get audited. But the best defense is a good offense. That's what TurboTax provides. And that's The Savage Truth.