Client Update

Avoid a Tax Audit: 5 Steps to Take

Did you know that small-business owners are three times more likely to be audited by the IRS than a regular employee-taxpayer is?

After you file your 2003 return, the last thing you want to receive is a letter from the IRS saying that you owe more taxes. To avoid having items on your tax return question, follow these accepted practices.

Five steps to audit -free returns

Step1: Report items just as they are reported to you.  The IRS uses computer matching to cross-check items reported to it on information returns -- Form W-2's and 1099s and now Schedule K-1's - with amounts reported on your return. For example, if your share of LLC income is $39,876 as listed on Schedule K-1, you should report this exact amount on your personal return.

If an item reported to you is incorrect, first ask the sender to correct it.  If there is a disagreement about what the correct amount should be, report the item on your return as it appears on the information return and then make adjustments you believe are proper with your explanation attached.

Step 2: Substantiate your write-offs.  Make sure you gather all records required to back up the position you take on your return.  For travel and business entertainment expenses, keep both written records with required information about the time and purpose of the expenses as well as receipts for any lodging and other T and E items more than $75.  For charitable contributions of $250 or more obtain a written receipt from the charity before you file your return; you are canceled check is not sufficient.

Step 3: Check for error.  The IRS posts an annual list of common errors to avoid.  For example, be sure to enter income, deductions and credits on the correct line of the return.  For a complete list of common errors, go to www.IRS.gov/tax topics/tc303.html.

Step 4: Review the average deductions. In order to keep low profile, you may wish to keep your itemized deductions within the ranges for taxpayers in your income bracket.  The IRS publishes these figures each year in its Statistics of Income Bulletins (go to www.IRS.gov/taxstats/index.html).

If you are entitled to claim a write- off greater than the average figure, be sure to have the necessary proof to back up your deduction.  For example, if you make larger charitable contributions than the amount reported for your income range, obtain written acknowledgments from the charities in case your return is questioned.

Step 5: Submit your return electronically.  If whether you do your return yourself or use a paid tax preparer, use a computer to figure your taxes and virtually eliminate math errors -- the main reason for the IRS to examine your return.  Math errors on computer-generated returns are under one percent, compared with 21 percent for manually prepared returns.