Audit rates for individuals are at historic lows. The overall rate is down to a minuscule 0.45% for 2019. But recent proposals out of Washington D.C. would give the IRS up to $80 billion for auditing upper-income taxpayers. And when you consider households with income over $87,000 are considered to be in the top 25% per IRS statistics and are already paying 87% of the income tax*, that audit target could be you!
Here are several ways to help make your tax return audit proof:
- Sweat the details now. Don’t wait around for the IRS to send you a letter informing you that you’ve been chosen for an audit. Conduct a self-audit where you examine previous tax returns. Obtain transcripts from the IRS and compare them with your return to ensure they match. Compare IRS statistics to your return to see if anything on your tax return might stick out. If so, focus on ensuring you have full documentation in these areas.
- Back up your deductions. When reviewing your projections for 2021, you may identify certain areas of your tax return that could raise a red flag with the IRS, such as higher-than-usual home office deductions or vacation home rental losses. For these deductions that the IRS may challenge, be sure to have proof to back up your claimed expenses. The key here is meeting the ordinary and necessary threshold for each expenditure.
- Assemble the required documentation before filing your return. Not only does this avoid last-minute scrambling during an audit, contemporaneous records are often required by the IRS. For example, you must keep a detailed log for business driving in your vehicle and document monetary charitable contributions of $250 or more. Remember that it will be far easier to gather the records as they occur rather than scramble to collect the necessary documents after-the-fact.
- Obtain independent appraisals. If you’ve donated appreciated property to charity, you can generally deduct its current fair market value if you’ve owned the property longer than one year. But the IRS still requires independent appraisals by qualified professionals for property valued above $5,000. Use a reputable appraiser for the type of property donated.
Please call if you’d like more information on making your tax return audit proof from the IRS.
*Source: IRS Statistics of Income, Individual Tax Rates and Tax Shares 2018
As always, please call should you have any questions or concerns regarding your tax situation.