How to Survive a Tax Audit
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By Jeff Schnepper
NEW YORK ( TheStreet) -- Unfortunately, there's really no way to completely avoid an audit.
Most tax returns are selected either on the basis of a special target group (for example, waiters were targeted for unreported tips) or on the basis of a computer program that compares your income and deductions to those in similar circumstances (if you have a ghetto zip code on your return, a $10,000 charitable contribution would get you noticed). But, some returns are randomly selected.
The key is to minimize your exposure. Here are some examples of what to avoid if possible.
The biggest reason that people receive letters from the IRS is a goof in the addition and subtraction.
According to the General Accounting Office, at one point about half of the 10 million notices the IRS issued each year were "incorrect, unresponsive or incomplete."
Fortunately, math errors rarely lead to a full audit. So if you receive a letter from the IRS that says you owe them, check your numbers first.
Sometimes, the IRS misreads one of your numbers or the number is keyed incorrectly into the IRS computer. If it's wrong, send a letter with a printout of your calculations.
Mismatched Interest and Dividend Reporting
Mismatched interest and dividend reporting is the No. 2 cause for a letter from the IRS. If the amounts reported don't match the amounts on your return, you will get another letter from the IRS.
There are lots of errors here. Sometimes, the IRS will enter the Form 1099 information into its computer and erroneously keystroke the income amount or the Social Security number of the recipient. If the income isn't yours, you should get a letter from the bank or other payer and forward that letter to the IRS. If the amount is incorrect, send a copy of the Form 1099 mailed to you by the payer.
On the IRS Hit List
The IRS admittedly has audit priorities. Those who receive much of their income in cash are traditionally on the radar screen of IRS agents looking for unreported income. A few years ago, "offshore credit-card users" -- Americans with credit card accounts in tax-haven countries -- were the bulls-eye in the audit dart board.
Today, it's the self-employed and small businesses. If you are self-employed or have your own business, you have more opportunity to either "hide" your income or "create" deductions by converting personal expenses into business expenses. To close the estimated $385 billion in uncollected tax receipts, the IRS has pinpointed small businesses and the self-employed as major audit targets.