HOW TO AVOID AN AUDIT

Successfully avoiding audits, while still claiming significant deductions, is a tax professional's and income tax filer's dream. Of course, we all love to dream about ideal occasions, like when our favorite sports team wins, or when our kids get the lead role in the school play, or when we finally get the big break at the office, or when we can avoid an audit completely. That doesn't mean that these dream days don't happen, though.

Here are a few things to make sure you are currently doing to help yourself avoid the ever present and lurking danger of an IRS audit.

• Make sure that any third-party income and reports agree with your records.
  
  
• Make sure you have selected the correct forms and schedules to fill out. Ask yourself: Do the forms apply? Am I stretching the situation? Are there credits that I am entitled to whose forms I haven't included but need to?
  
  
• Keep track of bank deposits so that all items will be easy to trace. Write the source of check directly on the deposit slip, especially transfers between accounts, so that these are not inadvertently counted as income. The first thing tax auditors request are your checking, savings, and investment accounts. They then proceed to do a total cash receipts analysis, comparing the total to the gross income shown on your tax return. By marking every deposit slip, you know where to look for further documentation to support your notation and the auditor will have the trail in front of him or her for the source of the unusual nontaxable receipts such as insurance recoveries, loans, gifts, and inheritances. Surprisingly, it's not that much work and is worth the effort.
  
  
• Always keep your checking and savings accounts free of irregularities. Be sure you can explain large bank deposits and increases (especially sudden ones) in your net worth. WARNING: If you have unreported income of more than 25% of your adjusted gross income, the auditor may turn your case over to the CID. If you suspect this may occur, do not provide any leads to the auditor regarding the sources of the unexplained deposits. The burden of proof is on the IRS. You do not have to provide leads that make their job easier.
  
  
• Keep your business and personal accounts separate.