Best Ways to Audit-Proof Your Tax Return

Don’t be afraid to take every deduction you’re entitled to. We don’t believe in not taking deductions just to try to avoid an audit. 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.

STEP 2: Turn your log into an affidavit. An affidavit is nothing more than a sworn statement that validates your activities. To turn your log into an affidavit, once a month take your log to a notary public (most banks have one) and have it stamped and signed.

Now you’ve made it 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. 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 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 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.

For more help on audit-proofing, check out friend Dan Pilla's web site www.taxhelponline.com.

Related links:

• What to do if You Get Audited
• Your Rights as a Taxpayer