Armchair Millionaire Community Bulletin: Steer Clear of the Tax Man

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Think preparing your tax return is bad? Facing an IRS auditor is even worse. As you prepare your taxes, take the common sense steps that can minimize your chances of being audited.

Fortunately, your chances of being audited are actually quite slim. According to the IRS, it audited just 0.65 percent of tax returns in the 2003 tax year, which works out to about 1 in every 154 returns. In addition, as evidenced by these comments by members of the Armchair Millionaire community, undergoing an audit is not always a bad experience:

"I have been audited once. It was about five hours of them looking thru every receipt/matching and cross checking. It came out excellent for me." --Mom2Two

"I was audited a few years ago. All went well for me, but not so the government. I was looking at a $2,782 liability, but when the audit was over the IRS owed me $763." --Ted B.

Nevertheless, you should still prepare your returns each year with an eye toward keeping the tax man at bay. The reason the IRS conducts an audit is to figure out if you accurately reported your income, deductions and/or tax credits. This means that the best defense is to file your returns correctly and completely, and back them up with complete records. My checklist provides some of the most important steps for steering clear of an audit.

The Armchair Millionaire's Checklist for Avoiding an Audit:

Match up your numbers. You know those W-2 and 1099 forms that report your employment, interest and dividend income that you receive each year? The IRS knows about them, too. If the income you report on your return doesn't match up with the income reported on those forms, the IRS will find out, and it could trigger an audit. Likewise, the IRS compares tax deductions for alimony payments made by one former spouse to the alimony reported by the other. It will also check to ensure that your state return lines up with your federal return.

Don't wave a red flag. Some types of deductions are more likely to raise eyebrows than others, including claiming home office expenses and outsize charitable contributions. This doesn't mean that you shouldn't take deductions to which you are legally entitled. It does mean that you should keep meticulous records that prove their legitimacy.

Do your math. If you don't bother to check your addition and subtraction, the IRS figures you're going to have other errors on your return as well. So give your return a good once-over after you've completed it. Better yet, use tax preparation software that will do that math for you. (TurboTax from Intuit and TaxCut from H&R Block are two favorites.)

Explain any unusual stuff. Did you report $75,000 of income last year, but only have $20,000 to report this year? Claiming a huge casualty loss because your house got wiped out by a hurricane? Help deflect unwanted attention by including a detailed explanation, along with relevant supporting documentation.

Fill in the blanks. Don't leave blank spaces in your return where there really should be numbers. And don't forget to sign your return--a mistake that is more common than you may think.

The Bottom Line: Think preparing your tax return is bad? Facing an IRS auditor is even worse. As you prepare your taxes, take the common sense steps that can minimize your chances of being audited.

The Armchair Millionare Weekly Survey: Does your employer offer a 401(k) plan? Log on to http://www.armchairmillionaire.com and let us know.

Lewis Schiff founded the Armchair Millionaire Web site in 1997. His first book, The Armchair Millionaire, was published in 2001. Schiff's newest report, "How to Know When You Are Rich," is now available at http://www.armchairmillionaire.com.

Constant Income:

Lewis Schiff

Armchair Millionaire

877-833-2823

http://www.armchairmillionaire.com

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Lewis Schiff