One of the most dreaded outcomes of filing your taxes is receiving notification that the Internal Revenue Service would like to administer a tax audit on you. In the simplest terms, a tax audit is an examination of your tax returns to verify that your income and deductions are accurate. The IRS examines your tax returns in great detail to determine if the financial information you provided was reported correctly.
A recent IRS trend shows that correspondence and in-person audits are on the rise. You can be selected for a tax audit for a number of reasons including random selection, computer screening where a mathematical reconciliation error has occurred, document matching reasons, unusual or excessive use of deductions, recent tax returns filed in bulk, or a related audit or collection case being worked by the IRS, among others.
While many believe you should be fearful of the auditing process, it’s not as daunting as it may seem. Most people are only required to answer a few additional questions and the issue may be very simple and easy to resolve. Regardless of the issue, you can reduce your chances of being audited by following these 7 steps.
1. Know If You’re a Target:
As we mentioned above, there are several different ways the IRS selects individuals for an audit. While the process can be random, the IRS has a system called the Discriminant Income Function (DIF), which is used to flag potential audits. The statistical system compares your deductions with others in your income bracket.
Recently, Congress has been restricting the IRS budget causing the IRS to carefully select where they spend their money on audits. As a result of the smaller budget, the IRS has been more selective in choosing who to audit to get more value out of their costs.
It’s also important to understand the IRS process and what is often questioned. The most common flags for an audit include extreme debt expenses, casualty losses, home office deductions, medical expenses, charitable deduction, ministry expenses, and meals and entertainment. While you can’t completely eliminate your chances of being selected for an audit, you can lower your odds by keeping proper documentation and following the remainder of the steps.
2. Keep Good Records:
Save all receipts from expenses and charitable donations. Many individuals use charitable donations as deductions from their income but fail to obtain the required documentation of these donations. In order to avoid an audit, obtain a receipt and keep all records from all charitable donations you claim.
3. Report All Income:
As we previously mentioned, the IRS has a tracking system in place to determine which income tax returns to audit. The system gives tax returns two scores: one based on whether or not it should be audited and one based on the likelihood of unreported income. With a highly advanced tracking system in place, it is extremely important to report all of your income in order to avoid an audit.
As an individual, you must report all income and do so correctly. Some individuals believe that because the risk of an audit is small, they can get away with fudging small numbers. You will always attract the attention of the IRS if you fail to report income and over-report expenses. The risk is truly not worth it so if you want to avoid an audit completely, report all income.
4. Understand Ministry Expenses:
You’re able to deduct several ministry expenses including meals, entertainment and housing allowance, among others. It’s important to fully understand what is and what isn’t considered a ministry expense as the IRS often double-checks these types of deductions to ensure they are legitimate business expenses.
It’s very important to keep track of all paperwork and records so you can clearly defend any deductions and credits.
5. File Properly & Completely:
One of the most common mistakes is incorrectly filing IRS paperwork. When you make mistakes on the paperwork or leave portions of the form blank, it commonly triggers an audit. In order to avoid an audit, answer every question and fill in every line even if it’s with a zero or a dash. Additionally, either type your returns or write neatly. If the IRS can’t read your form, they may find it suspicious and flag it for an audit.
6. Check Your Math:
A significant amount of people are audited due to mundane math errors. If the numbers of your forms don’t match or add up correctly, the IRS will likely notice. Use exact numbers rather than rounding, and double-check everything.
7. Update the IRS:
Life-changing events such as marriage, divorce, the birth of a child or purchasing a home can all change your tax status, so it’s important to account for these changes. Additionally, if you move, send a change of address form 8822 to the IRS. The IRS sends paperwork to the last known address so if you don’t change your address, you could miss important documentation from the IRS.
While the IRS only audits about 1 percent of clergy and only a fraction of those people require a face-to-face meeting with an IRS agent, it’s best to avoid the auditing process altogether . If you have received a letter or phone call from the IRS requesting an audit, contact us as quickly as possible. For immediate audit assistance from Clergy Financial Resources, contact us at (763) 425-8778 for a FREE and CONFIDENTIAL consultation.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
For more information or if you need additional assistance, please use the contact information below.
Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (763) 425-8778
Fax: (888) 876-5101