If the IRS Comes Knocking

If the IRS Comes Knocking

Odds are you’ll end up paying more in tax but there’s no reason to panic

If you get audited, odds are you’ll end up paying more taxes. Thanks to computer-aided selection of targets, about 80 percent of audits pull in extra tax. Agence audits millions of individual returns, about 3% of the total field and there is going to be more sniffing around. Today the IRS audits twice as many tax-payers as it has been accustomed to doing since the 1980s. It’s also the most probing, and upper-income professionals, self-employed people, investors claiming big losses, people with considerable income from tips are the top targets, but no groupe is immune.

Audits come in three flavors. Least intimidating is a correspondence audit, which usually involves a letter asking for documentation to back up a single ite on a return – perhaps a charitable donation. More fearsome are office audits in which you are asked to come to an IRS office for a more detailed probe that may cover a number of topics. At the top tier are field audits, which most often involve business-related returns, may cover more than one year, and are coundcted by highly trained revenue agents at a taxpayer’s home or office. Self-employed people may be selected for a field audit at their place of business since that’s where records are usually kept.

If the IRS Comes Knocking. Photo by Elena

When the IRS contacts you, it has usually found something suspicious and may propose an increase to your tax up front. Experts warn:

The IRS has the presumption of correctness. You have to show why their proposed changes are wrong.

Be wary of a wolf in sheep’s clothing. The examiner you meet is likely to be friendly, professional, and even sympathetic, but his or her goal s th extract more tax from you.

Don’t volunteer information or stray when answering questions. Taxpayers can paint themselves into a corner by failing to understand the tax implications of their answers. Being laconic but responsive reduces the danger.

Correspondence audits can often be handled on your own, but if you race an office audit, you may want to turn to an accountant for guidance. When the extra tax involved is small, it may not be economic to hire a professional.

File Smart Planning Moves

Planning ideas that make a difference, from the experts of Ernst & Young

Make your contributions to an IRA or Keogh plan early in the year. The combination of making contributions early in the year and compounding will make your money grow faster.

Contribute the maximum to your 401 (k) plan early in the year. If you wait too long, you may not be able to contribute the full amount because of limitations.

Focus on the after-tax yield when comparing the returns on different investments.

Replace personal debt with mortgage debt to the extent possible. Interest expense on mortgage loans is – subject to some limitations – deductible; personal or consumer interest is not.

If you roll over a pension distribution to an IRA account, be sure you do it in a timely fashion. You must complete the transfer within 60 days of a payout