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Even though the time for submitting your tax return is over, the stress of tax season will linger for millions of Americans who will face an IRS audit in the coming months. If you've never been through an IRS audit, the experience can leave you shaking. That's because the burden of proof is on you to convince the IRS that you reported all your income, and were entitled to all the credits, deductions and exemptions that you claimed in your tax returns. It's no secret that the more complicated your tax returns become, the more likely the chances are that you will receive an unwelcome letter in the mail one day informing you that you are being audited.
What are the big red flags to the IRS? According to FindLaw.com, the world's leading source for online legal information, tax returns that trigger IRS flags are for individuals or households reporting higher incomes, as well as returns for those who own small businesses, especially home-based businesses, are self-employed, or work in professions involving payment in the form of cash and tips, such as a waitress or self-employed construction worker. In addition, those with higher incomes also face a far greater chance of being audited. In both circumstances, tax returns with a large number of deductions may be flagged for an audit.
If you're in a high-risk category, it's essential to understand tax laws and regulations to ensure that you are reducing your risks by filing correctly. Here are some tips offered by FindLaw.com:
Tax planning is a year-round chore. While it's still early in the year, start now to work with your accountant to create a plan that involves taking full advantage of all tax deductions for which you may be eligible and carefully monitoring the payment of your income taxes throughout the year.
Start keeping good records. Create a filing system in your office or at home that is dedicated to saving documents such as tax statements, sales receipts, contributions, etc. If you travel often for your work, keep a journal in your car to record mileage and other travel-related expenses. If you use a computer at home for both work and personal reasons, keep track of the time you use the computer for each.
Document peaks and valleys. Large increases or drops in your income or deductions from one year to the next will draw raised eyebrows at the IRS. Make sure that you can clearly document such increases or drops.
Use receipts. If you're in a line of business where customers often pay with cash or personal checks, issue receipts with the name and address of your business. This will create a paper trail for both you and your customers.
Always file your taxes. Keep in mind, if you were laid off and received a severance package, or if you had to dip into your 401k or an IRA to make ends meet, you may need to pay taxes on that income. If you're currently unemployed and are concerned about your ability to pay your taxes, call the IRS Taxpayer Assistance Center at (800) 829-1040 to seek immediate help, or go to www.irs.gov.
Hire a trustworthy, experienced accountant. Contact friends and family members to obtain referrals for an accountant with whom you can work with all year round. Look for an accountant who has had experience with tax audits.
Neatness counts. Most tax returns are scanned or processed by computer. If your tax return is sloppy or difficult to read, it will be pulled for inspection. Use tax software to prepare your tax return or file electronically.
Don't throw away your tax returns. Always keep the last seven years of tax returns in a safe location should you be audited.
File on time. To avoid a big surprise on April 15, as in having to pay more taxes than you anticipated, assemble your tax records as quickly as possible after the new year to give yourself as much time as possible to prepare your taxes and to understand your tax burden. If you will receive a refund, file as quickly as possible to receive it; if you owe taxes, don't file until April 15.
Know your rights. Browse IRS Publication 1, explaining the Taxpayer's Bill of Rights, to clearly understand what your rights are as a taxpayer.
To learn more about tax laws and how to avoid an audit, visit the FindLaw tax center at https://public.findlaw.com/taxes/.