There is Good Reason to Worry About Tax Audit

There is good reason for Americans to worry about tax audit and be prepared for unwarranted attention form Internal Revenue Service as the government goes all out for tax collection.

In 2009 more than 1.4 million were audited – this being the highest number in a decade. This year even more numbers are expected as the government resolved to pour $8.2 billion for tax collection in 2011 – an increase of 10% over the previous year.

The obvious solution is to be very particular about tax return a sizeable number are not sufficiently careful. The IRS is determined to pocket each penny – one could be penalized for making even the smallest of errors.

The IRS remains secretive about its method for whipping returns a few tips could help ordinary folks and prevent them from popping up the radar screen of auditors.

The sorry state of the economy has led many to become self-employed. But this has made the tax authorities suspicious about their dealings based in their homes. There are many who are converting their hobbies into business to find the extra dollars required to survive. But proper records have to be kept to prove that this business is legitimate. To be safe, a separate bank account needs to be maintained for this particular business. It should be properly registered and run with the help of an attorney and qualified accountant who is conversant with tax matters.

For any activity to be considered a business raking in profits its gross income for any 3 of the last 5 years has to be more than the deductions taken to run that activity.

The high expenses of individuals who claim to be self employed will raise the auditor’s suspicious. Details relating to travel, entertainment and vehicle expenses would be peered into to assess its proportion to the income of the person.

The government is also cracking down on accounts outside the country. This year these will catch the roving eye of the auditor. It is not only those with mega accounts that will come under the scrutiny but small fry should also be cautious and follow the rules so as not to be faced with jumbo penalties. Maureen McGetrikc of BDO Seidman said, "Foreign bank accounts have been all over the press lately – it’s definitely a big thing this year. People need to make sure they indicate on their tax returns if they have one, and make sure they include any interest income from that bank account on their returns."