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7 Ways to Fight a Tax Audit

Be ready. IRS agents will be poring over returns

There is no way to absolutely guarantee 100 percent that you won't be audited. But as you prepare your tax return, consider these seven proactive protectors to reduce your risk of drawing IRS attention — and to clear things up quickly if you do.

1. Avoid round numbers

A tax return with lots of round numbers — $1,200 in travel expenses or $1,500 in charitable contributions — "suggests that you're just estimating those claims, and the IRS loves to go after people who don't keep good records," says tax attorney Frederick W. Daily, author of five tax-related books, including Stand Up to the IRS. "You don't need to include cents, but use the closest accurate dollar amounts, such as $1,260 or $1,525."

2. Explain on paper what you can't with e-filing

Do-it-yourself tax preparation software makes for easier and more accurate tax return preparation. But you can get into trouble if you file electronically with software that has no capability to include disclosure statements. You should include these "whenever there's something unusual in your return," says Rosenberg, who is an accountant and an "enrolled agent," a person authorized to represent taxpayers before the IRS.

If you use one of these programs, she suggests not using its e-filing feature if there's anything that might leave an IRS officer wondering. "Print out your return and attach an explanation statement and mail it in."

In many cases, a type-written note will suffice to explain such red-flag issues as losses for a small business (that dang lousy economy), a high mortgage interest deduction compared with declared income (you were downsized and are paying your mortgage from savings) or a home office deduction for a regular W2 employee (ideally, that will be a letter or policy statement from your employer).

3. Double-check your math

It's no surprise that sloppy arithmetic on a paper return can flag an audit. But what are the prime math errors? "People list correct numbers but on the wrong line," says Rosenberg. So make sure sums are not only correct but in the correct place.

4. Mind each line

Don't forget the easy stuff — your Social Security number, address and signature. "It's a myth that if you fail to sign your return, you will automatically be audited," she adds. "The IRS will simply send it back for your signature. But if you repeatedly forget to sign and the IRS believes this is a deliberate pattern, you could face fraud penalties, and unwanted attention on your future returns."

Next: Do you document your donations? You might need to. >>

5. Document your donations

The IRS knows that many taxpayers are extraordinarily generous, at least in the charitable contributions they declare. Claims of giving, say, 10 percent of income may trigger attention, as the norm is about 2 percent. So be prepared to back up claims with written proof. As you give, collect letters or receipts from charities, both for monetary and in-kind donations — especially those over $250.

"When you donate to Goodwill, it's no longer enough to leave a bag of clothing outside the door," says H&R Block master tax adviser Elaine Smith. "You need a receipt."

For a big item such as a donated car, you used to be able to deduct fair market value, no matter what the charity did with the car. Now you can claim that amount only if the charity uses the car. If it's sold at auction, you can only deduct the usually much lower price that the car actually commanded. Your receipt should specify what happened to the car and if it was sold, for how much. And you should have detailed paperwork on any car donation worth $500 or more.

6. Keep records beyond receipts

At audit time, you might need to demonstrate that a restaurant receipt actually represents dinner with a potential client, not a night on the town with your spouse. "Receipts don't talk," says Daily, so for those whose relevance isn't obvious, jot down notes as you go along. "It can be nothing more than 'dinner with John Smith, prospective sales client,' " he adds. But such a log will add credibility to your claim. It's unlikely the IRS will contact your dinner partner, unless there's suspected fraud.

7. Track your bank transfers

If your return is flagged, the auditor will run a total of all the deposits in your bank accounts, says Rosenberg, "and if you move a lot of money between different accounts, it could appear as though you have three or four times more money than you really do." So be prepared to document these transfers carefully to show that a deposit doesn't necessarily equal new income. Not having such proof causes "more trouble in audits than any other issue," she says.

Sid Kirchheimer writes about consumer and health issues.

Updated November 2011

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