New Year’s Resolution: Don’t Be Audited

New Year's Eve is just around the corner and it's time to start making resolutions for 2012. When it comes to tax resolutions for next year, visions of refunds might be dancing in your head while you dream of deductions while lying in bed, but don't dream too hard or old Scrooge will call your deductions from up to three Christmases past for an IRS audit!

What causes IRS audits? After many years experience with thousands of returns, here is the Christmas shopping list of things the IRS is looking for on your return.

Using the wrong tax preparer can actually bring you coal for Christmas! That's right, some people get audited because their tax preparer got audited. The problem has become so bad that last year the IRS stepped in and set up licensing and continuing education requirements for tax preparers. The agency reported that more than 100,000 preparers (out of an estimated 730,000) still did not get licensed. Avoid this problem by asking to see your preparer's license. Your preparer should be either a CPA (Certified Public Accountant), an EA (IRS Enrolled Agent) or, after the first of 2012, one of the new entry-level licensees called RTP (Registered Tax Preparer). Ask them what classes they attended last year; as a minimum, every one of the above folks has to attend continuing education credit every year.

The Grinch at the Treasury Department publishes average tax deductions. I have always believed that exceeding the averages by more than 100% triggers the partridge flying down on you from the IRS pear tree. A sophisticated tax software program will tell you if you are exceeding the averages.

Losses from small businesses and unreported income are as annoying to the IRS as massive lines at the check-out at every retailer. Make sure your business deductions are legitimate and that you report all your income.

High levels of income can increase the risk of an IRS audit. Data shows that Americans with more than $100,000 of income are nearly twice as likely to be audited as those with $50,000-$100,000 of annual income. If you have really obtained the five golden rings of income, once you hit $200,000 your audit chances double again, and if you somehow hit the Miracle on 34th Street with earnings of more than $1,000,000 your audit risk doubles again.

There are many deductions that are allowed on your tax return, and good tax planning can utilize them. So just like Santa "make your list and check it twice" on deductions.

Wishing you many happy returns,