Imagine you go to your mailbox and surprise, surprise you find a letter from THE IRS! They are asking you to visit them for a few hours and oh, by the way, bring your last 3 years of tax returns and every receipt or document that supports the deductions that you made. Now you’re breaking into a cold sweat.

Recently, for one of my clients, this was not imaginery, it was for real.

No one knows who’ll be audited. Your chances of being audited are very low. However, if you are audited, be prepared to defend yourself. The keys to surviving an IRS audit are 1) having an excellent bookkeeping system, 2) being able to “follow the money” and 3) understanding your return.

Bookkeeping System

Whether individual, family or business owner, you need to have some sort of bookkeeping system in place. It can be a formal software package, a spreadsheet or a notebook. No matter what you use, you must have a system that allows you to prove and support any income or deductions that appear on your tax return. In my opinion, the ideal system allows you to track your income and expenses in detail on a month to month basis. This allows you to build consistency in your reporting and also to see income or expense trends.

Follow the Money

You must also have a retrieval system for all the supporting documents in your bookkeeping system. It is not enough to have a cancelled check. You must also have the invoice or receipt that provides the reason you made that payment. In case of an audit, you will be asked to provide the receipts, so set up a system that allows you to present the receipt to the examiner.

(Yes, I know receipts can fade and be unreadable. Consider scanning them into your computer and then backing up the files. Consider the program, “NeatReceipts” for this purpose.)

Understand Your Return

Finally, remember your return is your return, not the tax preparer’s. You will be the person audited and not the tax preparer. You must understand the numbers on your return and how and why they are there. Spend some time with your prepaper and have him/her review any item you have questions about and be sure you understand it. Don’t let anything go by that you can’t support. Remember you will be the one who has to pay!

Some specific areas that the IRS will look at are –

Charitable contributions
Non-Cash donations
Cellphone Usage
Excessive Medical Expenses
Unreimbursed Employee Expenses
Business Use of Automobile – Mileage or Actual Expenses
Schedule C- Profit and Loss from Business
Rental Income and Expenses

Unfortunately, these three keys – Excellent Bookkeeping System, Follow the Money and Understanding Your Return, won’t keep you from getting audited. However, they will make your chances of having to pay additional taxes much smaller.

If you have questions, please feel free to contact me at 240-356-5050 and also feel free to add your comments to this blog. (Now go find those receipts and get them filed!)