When it’s time to file taxes again, let’s talk about how to avoid being audited

When it’s time to file taxes again, let’s talk about how to avoid being audited (Alberta Times) In 2010, eight out of every 10 people who were audited had to pay back taxes and fines. In...

(Alberta Times)

In 2010, eight out of every 10 people who were audited had to pay back taxes and fines. In 2011, the IRS garnished wages or seized bank accounts from 3.7 million people. To reduce the chance of tax audit, you must have a comprehensive understanding of your income and expenses, collect all tax filing documents, and keep the original documents so that your tax filing complies with tax laws and saves taxes legally. Due to the development of computer technology and the increasing complexity of tax filing, the IRS no longer needs to manually screen and inspect taxes. All screening procedures are conducted by computer. The first thing to avoid being audited is to avoid having the computer light up the Red Flag. The Red Flag lights up because the IRS sets various comparisons in the computer program. If the difference between these comparisons exceeds a certain limit, the computer will light up the "Red Flag". There are three most important comparisons: First, W-2 forms and 1099 forms are both provided to individuals and the IRS by third parties such as employers. For this year's tax filing, the IRS added per-share transaction costs to Form 1099B reported by stock companies to the IRS, which will be compared with the new Form 8949; added Form 1099K for commercial cards and third-party payments for comparison with Form C for small businesses; added new Form 8939 for declaration of overseas assets for comparison with information reported to the IRS by foreign banks. The second is to compare the individual tax return with the average of other similar individuals. If people in similar occupations in the area have a net income of 40,000 to 50,000 yuan after deducting various expenses, but this person receives low-income tax rebates and medical insurance, and the total income is only 10,000 yuan in net income, he may be investigated. The third is to compare the personal tax return with other personal information. For example, if an individual reports a low income of 10,000 yuan, but the bank reports to the IRS that the mortgage interest paid to the bank is 20,000 yuan; if an individual reports a low income for many years, but is able to buy multiple properties with cash, they may be subject to tax inspection. In 2011, the IRS reviewed 1.6 million personal tax returns, accounting for about 1% of all tax returns. Among them, the investigation rate was 3.9% for those with incomes above RMB 200,000, and 12.5% ​​for those with incomes above RMB 1 million. When filing taxes, high-income earners should be particularly careful when using deductions for various expenses such as charitable donations, home offices, car mileage, entertainment, etc. If a negative number appears on the C list of a small business, the probability of being investigated is almost 100%. On the other hand, the rate of tax inspections for those who apply for the Individual Income Tax Credit (EITC) is also very high. The IRS will shift from the method of "tracking tax filers after the event" to the method of "reducing tax audit burdens beforehand or immediately." For example, in the IRS's 2011 low-income tax refund review form 8867, the accountant must inquire in detail about the client's source of income. If there is no W-2 or 1099 form to prove income, cash earners must further inquire for a reasonable explanation. If you are not eligible to apply for a low-income tax refund, the accountant must include it in writing in the client's file for IRS inspection. This Form 8867 must be signed by an accountant and submitted to the IRS along with the client's personal tax return. Both accountants and clients will be punished for false declarations. Since CPAs are subject to strict government and industry regulations, personal tax returns signed by them are much less likely to be audited than general tax preparers.