How to Prepare for an IRS Audit

By John Pontius, Tax Section Co-Chair

While only 1% of all tax returns will be audited, it is the best practice to prepare for an audit before you file your return. This means that you have followed the tax laws and kept good tax records.

The IRS generally has three years to examine a tax return from the date of filing. This period increases to six years if the tax is under reported by over 25%. In cases of fraud, the IRS has no time limit to examine a tax return.

Every charitable contribution requires written proof to include the amount of the contribution and the date of the contribution. When donating noncash property, use the fair market value of the item given. Business expenses are another area that is commonly examined. Expenses for meals and entertainment, and travel draw additional scrutiny. It is recommended to keep records of where you were, who you were with, and the business purpose of the expense. Medical and dental expenses can be deductible if they exceed 7.5% of your adjusted gross income.

If you sell stock or real estate, you may have to pay capital gains tax on your profits. Your profit is calculated by taking the selling price and subtracting the amount you paid for the investment. This is known as your cost basis. Starting in 2011 the broker-dealer was required to report the cost basis to the IRS on Form 1099-B. For older purchases, it is recommended to keep your old statements with purchase and transfer information. For real estate, your cost basis is increased by improvements. Please note that for the sale of your primary residence, the first $250,000 of profit ($500,000 if married filing jointly) is tax free. Additional profit is subject to capital gains tax. Now is the time of the year to meet with a tax professional to discuss tax planning for 2014. It will make next year’s tax season go smoother and could result in a lower tax bill.

Originally published in the Newsletter of the Bar Association of Montgomery County, Maryland.

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