What’s the Deal with Audits?
It’s tax season, so I’m going to be talking more about taxes over the next few months. I know, it’s not very fun to have to think about, but in the long run, it’s worth knowing more and not having to use it than getting blindsided and not having a clue as to what to do.
The first thing that you need to know about audits is that there are 3 types of audits that it could be.
- Correspondence Audit. You receive a letter from the IRS where they are asking for specific documentation that is related to your tax return. This is simple; give them the information they ask for and, if there are no discrepancies, you’re good to go.
- Field Audit. This is where an auditor comes to your home or business to verify what you put on your taxes. This usually happens if you do something that needs verification, like an adaptation to your home office or energy-efficiency changes
- Office Audit. Just like a correspondence audit, you have to provide the IRS with proper documentation to verify your taxes. The difference is that you actually have to sit down and talk with an IRS agent in their office.
So what can you do to be prepared? The simplest thing to do is to be ready in case you do get audited. Keep your tax returns and all of the things that you used for them for 7 years. H&R block recommends that you keep the following:
- home mortgage statements
- Forms W-2 and W-2G
- Forms of the 1098 and 1099 series and Schedules K-1
- receipts for employee business expenses
- justification of fair market value for any items donated to charity
- receipts for items donated to charity with value greater than $500
- receipts for charitable contributions (including cash contributions made after 2006)
- receipts for rental property income
- brokerage statements
- receipts for qualified education costs (this includes loan payments, etc).
- 401(k) statements
- IRA contribution records
- receipts for items sold at a gain
- home-office-related receipts
- pay stubs
- copy of the front and back of the check you used to pay your tax balance due, if applicable
Holding stuff for 7 years may feel a little excessive, but, trust me, if you end up getting audited, you don’t want to have to dig around for everything that you need for your audit.
Most people do not get audited; usually only 2-5% of people get audited a year. Very few of those audits are for no reason at all, most of them are because of certain “red flags” that the IRS has, like excessive deductions, home office deductions, and previous audit history. So, be prepared if you have any of those things on your tax return.
Have you started your taxes yet? Do you have everything together? Employers must give you your W-2′s and such by January 31st, so make sure that you have those ready ASAP. Have a great weekend, and as always, spend smart, save smart!
