How to avoid a tax audit

by Center for Personal Finance editors

ATLANTA (4/2/08)--It pays to be proactive, particularly when it comes to avoiding a tax audit. Whether you're facing an audit or trying to side-step one, you can take steps to ease the pain (CNNMoney.com March 14).

Keep it neat. If you turn in a messy return--which is more likely to contain math errors and omissions--you're more likely to be targeted by the tax man. Use tax software and file electronically to make sure all numbers are legible and all boxes are filled in.
Watch home office deductions. These typically are red flags for the Internal Revenue Service (IRS), so experts recommend you estimate on the low side when it comes to listing square footage of your home office as well as the percentage of home expenses you're writing off to the business. Keep detailed records.
Report all income--including cash. IRS agents look for unreported income, particularly from individuals who receive much of their income in cash, such as waiters and people who work in the gaming industry (MSNMoney.com Feb. 20 and MSNMoney.com Jan. 18).
Keep receipts. Being able to substantiate your deductions can help during the audit itself, particularly with respect to auto, travel, meals, and entertainment. The rule "no receipt, no deduction" applies for meal and entertainment expenses of more than $75. Keep a detailed record of dates, people entertained as well as their business relationship to you, and notes about the business discussion.
Get--and stay--organized. If you meet with an auditor and present a disorganized box of receipts, you're more likely to prolong the pain. But if you have full substantiation, you give the auditor the impression that you're confident you owe no additional taxes.

Printed Saturday, July 5, 2008

Your Credit Union

How to avoid a tax audit