Receiving a letter from the Internal Revenue Service announcing an intention to audit your income tax return is enough to run shivers down your spine and through your wallet.
Are there ways to avoid such a confrontation with the dreaded tax agency?There is no foolproof way to avoid an audit, but there are ways to lower your chances, according to Kim C. Ferrell, managing auditor of the State Tax Commission's Corporation Franchise Tax Section. The main reason audits are conducted is to ensure voluntary compliance, said Gail Anger, an IRS appeals officer.
Speaking during a Salt Lake Area Chamber of Commerce seminar on how to avoid an audit, Ferrell said all people must file returns and even corporations that are not doing business must file returns as long as they remain incorporated.
Some of the reasons business returns are audited are wrong corporate numbers placed on the return, failure to report address changes, failure to answer all of the questions and failure to include a copy of the federal return with the state return.
Anger said the IRS processed more than $101 million income tax returns in 1986 (the last year for which figures are available) and of that number only 1 percent were audited. Here are some of the reasons audits are made:
- Computers choose a certain number of returns annually at random.
- Failing to file. Computers are geared to make certain taxpayers file every year.
- Some people brag to friends who turn them in because they believe everyone should pay taxes equally. Anger said the complaining people can collect 10 percent of any taxes recovered.
- Criminal investigators are continually looking for people with expensive cars, boats or houses to see if their reported income can afford these items.
- People in all areas, including rural, are selected for audit because "we want everyone to know the IRS is alive and well," said Anger.
- People in certain professions have a greater chance of being audited.
- Income tax returns with particularly large deductions are quite likely to be audited.
- Each return gets a score and the higher the score the more likely the taxpayer will be called in for an audit.
- The higher a person's income the more likely are his chances of being audited.
What to do if audited
- Don't talk too much. Let the auditor find any adjustments.
- Answer all questions honestly.
- Be in a good mood.
- Give the auditor exactly what he wants, no more no less.
- Don't argue with the adjustments unless you know what you're talking about.
- If you have a complex return, seek professional help.