Audits: When the feds take a closer look
“The Internal Revenue Service is working hard to collect every single greenback it can,” said Catherine Clifford in CNNmoney.com. That means more Americans are getting audited these days: In 2007, the number of audited returns increased 7 percent from 2006, to about 1.4 million. Much of that increase has been among high-income filers. “The more money you earn, the higher the chance that you have some mistake in your reported income, and the more valuable that potential miscalculation is to the IRS.” Indeed, filers with six-figure incomes are more likely to come under IRS scrutiny, and “one out of every 11 individuals with incomes of $1 million or more faced an audit last year.”
The IRS uses a top-secret scoring system to identify iffy returns, said Eileen Alt Powell in the Associated Press. Essentially, they compare individual returns to national trends in order to determine whether a taxpayer may be taking too many liberties with deductions and credits. But the biggest tip-off is not reporting each and every source of income. “You want to make sure all relevant income information is on the return,” says Edward Smith, a tax partner with BDO Seidman. That includes dividends and interest, proceeds from stock transactions or the sale of a house, and money received from rent or self-employment.
There’s no foolproof way to avoid being audited, said Teresa Dixon Murray in the Cleveland Plain Dealer. What you can do—besides being honest—is avoid drawing undue attention to your return. If nothing else, make sure your return is complete, neat, and error-free. “Messy returns raise eyebrows at the IRS.” If your situation is complicated, even trusted tax software may not do the trick: Hire a professional. “If you’re dealing with issues such as rental properties or small-business income, don’t be stubborn or cheap.” And don’t rely on your memory or handwritten notes for tabulating deductions, especially those relating to charity. “Starting with this tax season, you have to have documentation from the charity for every dime you donated in cash or goods.”