HOW TO SURVIVE AN AUDIT
By Jeff Schnepper, Author of 

You filed on time and even paid what was due by April 15th. But none of that is relevant.

You just got the envelope from the IRS and you finally won a lottery. Unfortunately, it was the wrong one – the audit lottery. Prepare for the pain!

Now that I’ve got you sweating and breaking out in hives, let me put some balm on your pain. You’re not going to jail and they’re not taking away your spouse (sorry). What they want is your money. And, if you follow my directions, they ain’t gonna get any.

Few people really understand the audit process. An audit is nothing more than the IRS asking you to substantiate the numbers on your return. Prove those numbers, and the IRS goes away empty and beaten. Fail to substantiate your figures and the IRS will empty your pockets.

You win an audit by keeping good records. I ask my clients to consider an envelope system. That’s where you throw all your checks and receipts in a box and once a month (or even once a quarter) you break them down according to category and put them in separate envelopes. For example, you’ll have an envelope for medical expenses, taxes paid, interest paid etc. If you have a business, you’ll have an envelope for each appropriate category on your Schedule C.

At the end of the year, I ask my clients to add the checks and receipts (don’t double count) and put the total on the outside of the envelope. Those are the numbers they give me and the numbers that appear on the return.

That sucks the power from the IRS and puts it all in your hands. Remember, an audit is nothing more than the IRS asking you to prove your numbers. If they ask about medical expenses, we hand them the medical expense envelope. If they ask about interest, we give them the interest envelope.

You have won the audit even before you filed the return.

One last point. Over the last few years, the IRS has shifted focus from substantiating expenses to looking for unreported revenues. The auditor will ask for copies of your bank statements and take the position that all deposits are added income. But, that’s not always true. A deposit could be from a bequest, from a gift or simply from a transfer from another account. But, the IRS will want you to show that it was not income.

Since you can be audited for 3 years from the due date of the return (or 3 years from the filing date if later), it would be more than prudent to keep a record of each deposit now, to avoid memory issues in the future.

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