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Audit Representation

Our system of taxation is considered to be voluntary. Do you remember volunteering to pay tax?

Many people are quite fearful of a tax audit. If you are being audited, stay calm, breathe in, breathe out. Generally, it’s not your fault.

Why Am I Being Audited?

DIF: The IRS program, ‘Discriminate Index Function’, or DIF, compares your return with others in the same income bracket, giving your tax return a score. This computer-generated score rates your return as to the likelihood of questionable items. The higher your score, the more likely an audit. For example, if the average contribution in your tax bracket is $500, but you report $5,000, your overall DIF score will rise. The computer however does not determine whether you will be audited. After a return is identified as to its potential, an experienced IRS examining officer reviews the return and then determines those which appear to have a good chance to add to the US Treasury.

UNREPORTED (CASH) INCOME: Always report all of your income. The IRS computers are able to match all (100%) of the wages your employer reports on the W-2, 1099-miscellaneous income, the interest income you receive from the bank, the dividends, the stock sales from your brokerage firm, lottery winnings, state refunds, ALIMONY, etc. Basically, everything that’s reported to the IRS is computerized and matched to your return.

ARE YOU SELF-EMPLOYED? The IRS has determined that a higher number of those who are self-employed have under-reported income and increased their deductions more frequently than those who work and collect a salary. Therefore, more audits are directed to this segment of the population. The same is true for those in ‘cash’ businesses, like taxicab drivers, waiters and waitresses, hairdressers, and even dentists, and some doctors. The IRS auditors have audit guides to aide them in reviewing a number of different businesses.

DO YOU CLAIM THE HOME OFFICE DEDUCTION? The tax rules for deducting this expense are quite complicated, and generally misunderstood. Many claim this deduction not realizing that they are really not entitled to it. It is for this reason that this is a special target for the IRS. Unless you lead a lonely life, and are looking to meet some new people, namely IRS auditors, don’t claim this deduction. If you do claim this deduction, thoroughly research it, and have the blessing of a good tax preparer.

ITEMIZED DEDUCTIONS: Another audit trigger is high itemized deductions in relation to your overall income. For example, the IRS would look a little closer if your mortgage interest is $15,000 and your income $40,000. Although the IRS publishes ‘average deductions’ claimed by taxpayers in the area of medical, taxes, interest, and contributions, depending upon the area of the country you live in, these tables may have little in relation to your area. For example, if you live in a high tax state, like New York or California, your real estate and income taxes probably make you exceed the norm. If you are older, your medical expenses are probably higher than the rest of the population. As a general rule, always claim all of your deductible expenses, and keep your receipts.

DEPENDENTS: You may have heard stories about taxpayers claiming their dogs, cats, favorite TV show, and others as dependents on their tax returns. The stories are true. This was a time when the social security number was not required on the tax return. Once the law was changed to require the social security number for dependents, more than five million dependents were dropped from the income tax returns. Today, the IRS verifies names and numbers with the Social Security Administration, so it’s important to make sure the information on the tax return and your social security cards are identical.

EARNED INCOME CREDIT (HEAD OF HOUSEHOLD): One of the most recent hot topics for not only the IRS, but for your state as well, is the Earned Income Credit. Over 50% of the returns claiming the Earned Income Credit are reviewed with many taxpayers receiving questionnaires as to their eligibility.
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