How,Audit-Proof,Your,Tax,Retur finance, share, loan How To Audit-Proof Your Tax Return Forever!

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Reprint Guidelines:** Attention Ezine editors / Site owners **Feel free to reprint this article in its entirety in yourezine or on your site so long as you leave all links inplace, do not modify the content and include my resource boxas listed above.If you do use the material, please send me an email so I cantake a look: mailto:[email protected]============================================================How To Audit-Proof Your Tax Return Forever!(My Recent Close Encounter Of The IRS-Kind)-- by Wayne M. DaviesCopyright 2003 Wayne M. Davies Inc.============================================================Congress recently passed legislation that is supposed toresult in a more "sensitive" Internal Revenue Service. Youknow, not such a lean, mean, tax-collecting machine. I DON'T THINK SO! Here's why.A few months ago, one of my clients (let's call him Mr.Jones) got one of those IRS "love letters" requesting moreinformation about his return, and the IRS wanted to meetwith Mr. Jones in person to discuss the situation (not agood sign!) Mr. Jones (a local small business owner) was required toshow up at the local IRS office with all his records. TheIRS was questioning the legitimacy of several businessdeductions -- and so the IRS was doing what it is allowed bylaw to do -- demand that the taxpayer prove that thosedeductions were valid.[By the way, most IRS audits are done these days by mail.Humans are rarely involved in these so-called"correspondence audits." Those big IRS computers can check and cross-check all kindsof information that should be reported on your tax return.And if something doesn't show up on the return that iseasily tracked by the IRS computers, then the computer justspits out a not-so-friendly "discrepancy notice", which youcan respond to via mail.] Turns out that Mr. Jones lost the audit and ended up owingthe IRS a significant amount of money -- the additional tax,plus penalty and interest for late payment of that tax. Why did Mr. Jones' lose the audit? Mr. Jones made two"classic" taxpayer mistakes: MISTAKE #1: "NO RECEIPT, NO DEDUCTION" Mr. Jones lost several deductions simply because he didn'thave the proper documentation to prove the deductions. What do I mean by "documentation"?Well, if the IRS requires you to substantiate a deduction onyour tax return, you must be able to provide written proofthat the deduction really happened. The easiest way toprove a deduction is to hang on to:a) The receipt or invoice, and b) Proof of payment, which can be a canceled check, cashreceipt, or credit card statement. Mr. Jones reported numerous deductions for which he simplydidn't have the documentation. No receipts, no canceledchecks, no nothing. Turns out that Mr. Jones was one ofthose "cash guys". Do you know what I mean by a "cash guy"?Maybe you know what kind of guy I'm talking about -- Henever wrote a check in his life, just carried a wad of casharound in his pocket. He paid for everything with cash, andnever kept any of his receipts. Every year he would just sit down with his wife and"remember" how much he spent on different things. No way toprove any of this, of course. He just had a "feel" for howmuch cash he had spent, and he had run his business for somany years that he just "knew" how much it cost to purchasecertain things. Well, this is the kind of taxpayer that the IRS loves! It really is true -- if you can't prove that you paid forsomething (with receipts, invoices, canceled checks, etc.),then you run the risk of losing that deduction in the eventof an audit. One of the most common questions I am asked by clients isthis: "I know I paid for something, but I don't have areceipt. Should I still report the deduction." My response is usually this: "You only need a receipt ifyou get audited!" Think about that for a minute! At first, many clients don'tknow if I am joking or not. Well, I do make that commentwith my tongue planted firmly in cheek, but there really isa lot of truth to it. If you don't have the documentationto prove a deduction, you can still report the deduction(if you want), because you only have to prove the deductionif you get audited. But if you do get audited, knowing that there areundocumented deductions on the return, be prepared to losethe deduction! And here's the second major mistake that Mr. Jones made: MISTAKE #2: BOGUS DEDUCTIONS! It turns out that Mr. Jones wasn't completely honest with meabout some of his deductions. He reported deductions thatsimply were not real deductions. Here's one example: Mr. Jones owned several rental houses. These rental houses,of course, required maintenance and repair work. Manytimes Mr. Jones would do the work himself rather than paysomeone else to do the work. Well, Mr. Jones would estimate what he would have had to paysomeone else to do the work that he did himself, and thenhe would report that amount as a deduction, even though hedidn't actually pay anybody to do the work! In other words, Mr. Jones deducted the value of his time --a big No-No!This is an important point -- you can never legitimatelydeduct the value of your time for work you did. You have toactually pay someone else to do the labor. Well, that's what happened to Mr. Jones. He made a coupleclassic mistakes and paid the consequences. I hope you benefited by learning what can happen in a realaudit. If you ever get a letter from the IRS that demandsadditional information, you'll have nothing to worry aboutif you do exactly the opposite of what Mr. Jones did. Ifyou can properly document your deductions and assuming youhave no bogus information, you'll pass the audit with flyingcolors!