Do You Want to Audit-Proof Your Return?

While certain taxpayers have a higher chance of being audited, such as small business owners with a schedule C, how can you audit-proof your return? Actually, there is no way of insuring that you never get audited, but just in case you do, to make sure that you come out unscathed, there is one secret to help you to survive an audit – organized, clean records and documentation!

The secret is not glamorous, but it will save your nerves, your hard-earned money, and will most likely help you to be more successful. Some techniques for individuals without a business to audit-proof their returns are as follows:

- Make sure that you have received all of your W-2’s from every job during the last year, along with 1099’s for interest, dividends, and investment transactions. Leaving one of these off your return is sure to have the IRS send you a deficiency notice.
- Keep copies of all receipts, documents, and cancelled checks for charitable contributions and other expenses you claim on your return.
- Keep track of your cost-basis for your investments.
- I also recommend keeping your tax returns and supporting documents for at least 7 years.

For business owners:

You have much more responsibility, because you may have income tax returns, payroll taxes, and sales taxes that need to be filed, to name a few.

- Use a computerized bookkeeping program, such as QuickBooks. This will help you to run your business better as well.
- Reconcile your bank and credit cards accounts to your statements to make sure that you have recorded all information, and keep your statements.
- Keep all of your receipts and canceled checks to support your deductions.
- Maintain a vehicle mileage log for your business vehicles to prove business use.
- Document the business reason for your meals and entertainment expenses.
- Separate your personal expenses from your business. Even if you account for your personal expenses as a draw, it is much cleaner to pay for them personally.
- For sales that are not subject to sales taxes, make sure to be able to prove exemptions, with proper documentation for out-of-state sales for online retailers or tax-exempt certificates for contractors, for example.

The bottom line is that you need to be able to show proof for your expenses and deductions if you are audited or receive a notice from the IRS and state taxing agencies. Unfortunately, you are guilty unless proven otherwise.

What’s New for 2011?

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed by President Obama. The main focus of the new laws was to extend the tax breaks for two more years that were enacted under President Bush, and were about to expire at the end of 2010. With the passage of the new laws, virtually all taxpayers, including lower income and wealthy, will benefit. Here is an overview:

Individual Tax Brackets: Individual tax rates are going to stay the same, from between 10% to 35% of taxable income. Without the new laws they were set to rise from between 15% to 39.6%. This is a benefit for all taxpayers.

FICA Payroll Tax Cut: For one year, employees will see a reduction of their FICA payroll taxes, from 6.2% to a reduced rate of 4.2%. Look for this change starting with your first paycheck of 2011.

Capital Gains and Dividends: The rate on capital gains and dividends will continue to be between 0% to 15%, depending upon your tax bracket. Capital gains were set to rise to 20%, and dividends were to be taxed as high as 39.6%.

Child Tax Credit: The child tax credit will continue to be $1,000 per child, and will phase-out for joint filers with more than $110,000 of adjusted gross income, and at $75,000 for single filers. The credit was set to be reduced to $500 per child.

There are many other changes that will positively impact almost all taxpayers. These include: a one-year patch to the alternative minimum tax, extension of the American opportunity tax credit, bonus depreciation, the earned income credit, and several more. If you have any questions on how these changes will impact you, don’t hesitate to contact our office.