April 15th is almost here. Tax attorney Rob Wood has some suggestions for how to file a tax return that will survive a tax audit. He explains it in this report, based on his Forbes article “Five Ways To Audit Proof Your Tax Return Against The IRS.”
Taxpayers are perhaps less at risk of being audited today because the IRS has had its budget cut. Wood says that the reduced budget may be a factor in reducing the likelihood that someone will be audited, but taxpayers should not let this cause them to “do all sorts of creative things on their taxes. . . . Audit rates have always been low.” Less than 5% of returns have traditionally been audited, so the reduced budget may not be a big factor.
Wood suggests that the tax code has become complex enough that many taxpayers should consult professionals to prepare their returns. However, another good option is the use of tax preparation software. Wood looks at many returns, and he believes that the software is a good solution for many taxpayers. Organization is a very important step in preparing a return, and software can help with that by walking a taxpayer through the preparation process. Even the IRS Commissioner has positive things to say about the software approach.
Wood also emphasizes that taxpayers should not disclose too much information in the return. “A tax return is meant to be for numbers.” It is not an essay exam. Wood says that there may be things that require explanation, such as a Form 1099 that shows a payment of twice the amount that was actually made—such as receiving a payment of $10,000 that shows up as $20,000 on a 1099. If you can’t get a new form from the payor, you need to explain the error on your return, but “do it succinctly.” Don’t attach a lot of photocopies to prove that the correct amount is $10,000.
Wood says that it is also important to deal properly with 1099 forms. A taxpayer should collect them, keep them safe, and account for them. However, a taxpayer should avoid asking for a 1099 that doesn’t arrive when the taxpayer knows about the income ($10,000, to use the previous figure). The taxpayer should simply list the income and go forward. The key is matching. You need to list all the 1099 income you have, and what you report should match the 1099s you have received. However, it is not a “mismatch” problem if you report more income than the forms disclose.
If you are interested in the subject, you may want to look at Wood’s follow-up article, “Five More Ways To Audit Proof Your Tax Return Against The IRS.”
For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network. The Legal Broadcast Network is a featured network of the Sequence Media Group.