Lawrence Lawler: Hi! I'm Lawrence Lawler, National Director of the American Society of Tax Problem Solvers. This series is on how to prepare for an IRS Audit.
Today, we're going to be talking about when and how to prepare and the first item I'd tell you is that you prepare way before you know that you're going to be audited. You do this throughout the year by keeping good records and staying up-to-date with your information.
If you keep what the IRS calls Contemporaneous Records that means, that they are being maintained as you go along, you are not like the salesman who sits down and fills out his mileage log at the end of the year, but you keep this going as you go along. They find your records to be much more believable.
You should keep track of where your bank deposits come from. What is the source of a bank deposit? If the IRS looks at your bank statements and they see deposits that you cannot identify the source of, they may very well think that those items are unreported income.
So keeping track of where your deposits come from will answer many IRS questions as well as tracking expenses carefully, keeping invoices, canceled checks, things of that nature that will prove to the IRS that you not only had the expenditure, but that it was for something that is properly deductible.
Don't forget that you have a great deal of help available to you, and various software applications are available in the marketplace. There are all types of software out there to help you track your expenses, to record checks that you write, as you're writing, and you can actually write them on the computer. It's a good idea to make use of those things because they are an orderly or organized way to keep your records, making it easier for the IRS auditors to go through them and reducing the audit time and generally reducing the exposure to additional tax being assessed.
So another time to do your organization is during the preparation of the tax return. When you're actually sitting down and putting the figures on the tax return or working with your preparer, you should keep all of your information organized and stored for at least a three year period from the due date of the tax return. And if you want to be really safe, I tell most people, keep the information for at least four years. That way you don't ever run out of information that you needed at the last day.
The number of audits that taxpayers are experiencing, are increasing rather significantly and that's often due to the help that the IRS is getting from computers. If the computer does the matching of -- for example, third party information or they does an analysis and compares your figures to the national standards that other people are experiencing, it may actually kick your return out of the system and flag it for audit.
Let's say for example, that your contributions to charities are 20% higher than the norm for people who earn the same amount of money you do. That's going to be an item that would be flagged by the DIF Score that the IRS uses to determine whether or not you should be audited.
The next thing, I want to do is discuss with you, the preparation that actually takes place when you get notified that you're going to be audited.