Tax Tips

Returns

How to audit-proof a tax return

Audit-proofing techniques can be used effectively to prevent audits, penalties and the wasting of time. The techniques are simple -- especially since the IRS produces a special audit-proofing form you can use. Audit-proofing is based on the principal of providing with your return the information relevant to a claim in your return. You provide information for claims you think could raise a red flag and cause an audit.

Charitable contributions, mileage claims for a small business, unusually high entertainment costs, a home office deduction, or unusual medical expenses are among those deductions that are highly scrutinized.

By providing proof in the case of a potentially suspect deduction with the return, you eliminate the need for the return to be audited. Proof may include copies of canceled checks, copies of receipts, or an affidavit explaining how you arrived at certain deductions.

Form 8275 is a form the IRS would rather you did not know about or use. It is called the Disclosure Statement. When filed with the return, it calls attention to a claim made and says "I claimed this based on these specific grounds." In short, it allows you to prove your claim without going through an audit.

By proving your case before an audit, you greatly reduce the need for an audit, and the scope of an audit if there are other claims called into question later. The IRS would rather not audit those who are informed and prepared to quickly respond.


Assets

Appreciated assets/charitable gifts

Both you and a charity can benefit if you give appreciated assets to the charity instead of selling the assets and donating the after-tax proceeds. The amount of the savings will depend on how much capital gains tax you would have paid on the sale. For example,
suppose you are in the 39.6% bracket and plan to make a charitable gift of appreciated securities worth $100,000 with a cost of $40,000. You must choose between gifting the securities outright or selling the securities and gifting the cash proceeds.

The gift of stock allows you to permanently avoid at least $9,000 of tax on the appreciation ($60,000 appreciation times the 15% federal capital gains tax rate), and the charity receives the full $100,000 of value.