Tilting the Odds in Your Favor

Phil Beram
Chief Tax Counsel and Director of Tax Policy
U.S. Chamber of Commerce

It's getting close to tax return filing time. While there is virtually no way to "audit-proof" your return, there are many things you can do to reduce the likelihood that it will be selected for examination-or make it easier to deal with if it is.

When preparing your tax return, make sure you're working with complete and accurate data. This includes information from your books and records, such as ledgers, journals, invoices, and receipts. Prior years' returns and worksheets are useful for comparison, as they may point to new or omitted items or to aberrations between years that may need to be verified, explained, or further explored.

Comparing the information in your return with national tax statistics may reveal the likelihood of drawing the IRS' attention due to deviation from averages, norms, or other data representative of your industry or return type. You can access these statistics at www.irs.gov/taxstats. This is not to say that if you have legitimate deductions you should not claim them for fear your return will stand out. However, when claiming those deductions, be sure that they are accurate in amount, have proper backup, and have appropriate descriptions.

When setting forth items that are unusual in amount or in nature, a few strategies may be helpful. Breaking down large items into components may draw less attention. Providing clear descriptions may also help the return get past the government's watchful eye. With a provocative item, it's helpful to attach explanatory statements, schedules, or supporting documentation. In such instances, the IRS may follow up with correspondence rather than arranging a face-to-face meeting. A live audit is far more dangerous than correspondence because of the likelihood that other issues will be raised.

If your substantiation for an item is lacking, don't feel that you need to forgo the deduction. If you're selected for an audit, the IRS auditor or agent is authorized to consider reconstruction of missing information. Reconstruction from available records-such as business mileage from calendared appointments, addresses, and automotive service receipts-is common. The best advice in these cases is to be reasonable. Your reasonableness, the accuracy of other items on your return, and the plausibility of the reconstruction will weigh heavily in determining how much latitude you receive from the IRS. The IRS may forgive missing receipts for some deductions as long as you have other documentation that supports sufficient details of the transactions.

Remember, when preparing your tax return, a little extra care can go a long way toward reducing or withstanding scrutiny from the IRS.

The material in this article should not be construed as tax or legal advice. If expert assistance is required, see a tax professional.