Here’s what happens to your tax return when you send it to the IRS. First, it’s scanned and checked for math errors and against all form 1099’s to see if you under reported income. Your return is then sent to the Martinsburg, West Virginia center, where it’s given a score using a computer program known as the Discriminant Function System (DIF). The higher the score, the better is the chance your return will be examined immediately for problems. However, if you attached schedules and statements explaining the problem in more detail, the examiner may put your return back into the hopper, and you may totally avoid an audit. Although this program is the best kept secret in government, there are some things we know about the program that you can use to reduce the risk of an audit (if you file electronically, some of these steps won’t apply):
- File your return on time. If the IRS fails to receive your tax return, your chances of being audited increase automatically.
- Send all changes of address to the IRS by filing form 8822, “Change of Address,” whenever you move. The IRS is only required to send notices to your last known address. They are not required to make an effort to locate you, and the US Postal Service is not allowed to forward mail from the IRS (or any other federal, state or local government entity). So, even if you’ve moved and completed a mail forwarding card at the post office, you will not receive notices from the IRS to your new address.
- Use the IRS’s preaddressed label to speed up the processing of your return.
- File all elections that you’re entitled to. There are certain tax breaks and options that require the filing of an election.
- Report all of your income. The IRS already has all of your 1099 information and if it does not match what you report, you will very likely be audited.
- Have your return prepared by a competent tax preparer. Most people are not aware that if they do their own returns, they increase their chances of an audit because the IRS presumes that they don’t know as much as an accountant who prepares hundreds of returns.
- Break your income and large expenses into small segments. For example, break your business expenses down into travel, advertising and entertainment expenses. Separate your 1099 income from other sources of income.
- Keep records of expert advice. If you relied on the advice of your accountant or lawyer, keep records as to the nature and date of the advice. There are cases where a penalty has been waived for a good-faith reliance on an independent expert.