Saturday, April 5, 2003
Personal Finance
Re-checking 1040 may avoid audit
With 10 days left until the income tax filing deadline, double-check your returns for mistake, errors and the most common audit-inducing red flags.
Fix the problems now to avoid an audit later.
Even though the IRS audits just around one-half of 1 percent of all individual taxpayers, there are a few things you can do to ensure you won't be among those chosen few.
Most common automatic problems include:
Missing information. Make sure all the Social Security numbers and W-2 information is complete and correct.
Math errors. Just make sure you added and subtracted correctly.
Not-allowed deductions. Whether it's for something like credit card interest or medical expenses under the legal threshold, make sure you only take what is allowed.
Mismatched information. Numbers on a W-2 or 1099 should match exactly what you report on the 1040. If they don't, make sure you explain why they don't - or risk getting questioned about it later.
Some at high risk
Be particularly cautious if you fall into a high audit-risk category, such as small-business owners.
Such taxpayers filing a Schedule C tend to be three times more likely to be audited than regular individual taxpayers.
IRS statistics show that more than 2.7 percent of taxpayers filing a Schedule C claiming less than $25,000 in income are audited.Only 0.6 percent of all taxpayers get audited.
"The IRS may view these individuals as high risk because so much of the information is self-reported by the small-business owners themselves," said Paul Gada, a tax lawyer and small-business analyst for CCH Inc., a Chicago-area tax information publisher.
"Low-income reporting by a small business owner also could raise attention, as it begs the question of why the owner is choosing to be self-employed at all," he said.
The IRS also indicated it will pay closer attention this year to offshore credit card abuse, high-income taxpayers and abusive schemes, such as certain tax shelters.
May still get 'notice'
While your chances of getting the scrutiny of a formal audit are small, you still might get a "notice" from the IRS.
Millions of letters are sent out each year informing taxpayers of underpayments or inquiring about additional information.
Most of these can be handled with a reply letter or a simple phone call - but make sure they are handled. "The best advice is don't ignore it," Chris Kerns, IRS spokesman in Cincinnati, said. "Because if you let it go, penalties and interest can be significant."
Especially if you dispute owing anything, contact the IRS at the specific phone number on your letter. You also might want to contact the taxpayers' advocate or learn about the appeals process for truly disputed outcomes.
IRS Publication 1, Your Rights as Taxpayer, is available at www.irs.gov and outlines your options if you dispute an auditors decision.
Contact Amy Higgins at 768-8373; ahiggins@enquirer.com; or 312 Elm St., Cincinnati 45202. She regrets that she cannot reply to all individual questions.