3 Ways to Audit-Proof Your Tax Return

You can "audit-proof" your tax return against red-flag tax deductions such as home-office expenses, medical expenses, charitable contributions, travel and entertainment expenses, business use of your car, and business losses. How? By using our three-step audit-proof plan:

STEP 1: Keep a log.

STEP 2: Create an affidavit.

STEP 3: File a disclosure statement.

Here's how you can use these three steps if, for example, you're claiming a deduction for home office expenses:

STEP 1: Keep a log. Use a spiral notebook as a log book. Keep the log book in your home office and log yourself in and out each time you work there. It shouldn't take you more than one minute each time. Merely write the date, the time you entered your office, briefly mention the work you did and the time you finished. Make your log as readable and consistent as possible.

	Not surprisingly, the IRS makes a lot of money every year nit-picking deductions. In fact, the average face-to-face audit nets the agency $9,000 over and above what you already paid in taxes. And when you add penalties and interest, that amount nearly doubles. So, we don't expect the IRS to give up on audits, especially since Washington is trying to increase revenue (and the Government Accounting Office has given the IRS a slap on the wrist for not performing enough audits).

STEP 2: Turn your log into an affidavit. An affidavit is nothing more than a sworn statement that validates your activities and shows that you created your log contemporaneously (that is, at the
time of performing the actions). To turn your log into an affidavit, take your log once a month to a notary public (most banks have one) and have it stamped and signed. Keep the logs in your permanent tax records.

Now you've made it just about impossible for the IRS to come back and accuse you of having dashed off a defense of your deduction just prior to filing your taxes, or after receiving an audit notice.

Smart Money Move: To bring your log up-to-date for this year, have your appointment calendar notarized. The IRS considers an appointment calendar to be evidence of the work you've done at home. Having your appointment book notarized gives you an extra layer of protection.

STEP 3: Fill out Form 8275, the IRS Disclosure Statement. Call the IRS at 800/TAX-FORM and ask them to send you Form 8275 or go to IRS.gov. On this statement, you let the IRS know that you have supporting documents for any potentially controversial claim that appears on your tax form. You fully disclose the facts and present evidence showing you have a reasonable basis for making the claim. This way, even if your claim turns out to be erroneous, you don't get hit with penalties.

By filing Form 8275, you might outmaneuver the IRS. The IRS is more likely to pick a fight with the guy who doesn't tell them that he's got enough ammo to blow their claim out of the water!

That's our three-step plan for audit-proofing your tax return. No plan is 100% foolproof, but this one's darn close. Finally, remember to double-check your address, Social Security number, birth date and all of the numbers on your W-2 or 1099 before you mail out your tax returns. An innocent error on these items can also trigger an audit.

But If You DO Get Audited…

Remember your rights:

• Just say NO! You can say no to any decision the IRS makes. And when you do say no, you often get the IRS to offer you a better deal.
• You don't have to pay penalties if you simply made a mistake. Penalties are only due if you tried to beat the system. When you act in good faith and based upon a reasonable cause for your actions, penalties do not apply.
• The IRS can't force you to sit down face to face. You have the right to conduct your audit through the mail.
• You have the right to challenge any IRS notice without retribution.
• You have the right to pay your debt in installments. If you agree you owe more taxes and don't have the money to pay, the IRS must work out a payment schedule with you. You can use IRS Form 9465, Installment Agreement Request, to start the process.

For more details on your rights and how you can reclaim your upper hand, read Your Rights as a Taxpayer here.

We also recommend a book by our good friend, Dan Pilla, who helped us with this report. It's called "IRS, Taxes and the Beast," and is a terrific step-by-step audit defense guide.

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