Audit Proofing and Tax-Saving

Audit-proofing does not mean playing it safe. I am not advocating a conservative, meek approach to doing your tax return as a means of audit-proofing it. At no point do I suggest that you not take any deductions because they may increase your chances of being audited. On the contrary, you should take every deduction that you are legally entitled to take, regardless of whether it may increase your chances of being audited. You should not be afraid of taking legitimate deductions BECAUSE you are afraid of being audited. No matter how scary the prospect seems to you, your tax strategy should not be based on fear.

Your taxes represent your hard-earned dollars. What you pay to the IRS comes right out of your pocket. Forget, for a moment, that taxes are withheld from your paycheck, that you almost never see them, except if they are returned to you in the form of a refund check. Think how hard you've worked and slaved to earn your gross earnings. Every dollar in taxes that you pay comes out of those earnings. If you had less taxes to pay, your paycheck would be bigger. Think what you could do with the extra money.

The point is saving in taxes converts to saving dollars: Less to Uncle Sam means more to you. As a necessary tool of financial management, your tax strategy should always be tax reduction. Everything you do should be tax-efficient or tax-considerate. That means you should consider the tax ramifications of everything you do that involves money. Buying a house? Getting a divorce? Sending your kids to summer camp? Hiring a babysitter? Making trips to the doctor? All these activities have tax ramifications. For tax purposes, there's a right way and a wrong way, and the wrong way will cost your extra dollars.

Audit-proofing your tax return translates into saving tax dollars in several ways:

• First, when you become disciplined about keeping good records, you will probably end up taking deductions for items you never took before simply because you never knew they were deductible.
• Secondly, with proper recordkeeping you will probably end up taking deductions you never dared to before simply because you weren't sure you could support them in the event you were audited.
• Thirdly, if you are audited and win, you won't have to pay additional penalties and interest for the back taxes they would otherwise hit you with.

Perhaps the most worthwhile reason to audit-proof your tax return is the peace of mind that ensues, if you are audited, in knowing what the IRS will be looking for, and being properly prepared for them to find it. For many taxpayers, that advantage alone is worth far more than the cost of this book and the little extra time and effort that goes with audit-proofing.

The purpose of this book is to help you prepare to face the IRS by giving you the information you need to do so. There's an old adage on Wall Street that goes: "If only I could have tomorrow's Wall Street Journal today." In the same vein, may taxpayers have come out of a gut-wrenching IRS audit thinking: "If only I had known yesterday what they'd be looking for today."

This book gives you today the equivalent of tomorrow's Wall Street Journal. Each chapter contains exhibits of information taken directly out of the official Internal Revenue Manual for Auditors; plus, Part Three presents the complete auditing guidelines for practically every item on your tax return. This material is invaluable, so read it carefully.

Audit-proofing your tax return involves these 4 steps:

• STEP 1. Keeping proper records for an IRS audit.
• STEP 2. Getting correct information from the IRS (and others).
• STEP 3. Knowing what the IRS will be looking for.
• STEP 4. Avoiding tax scams, shams, and illegal shelters.

By following these four steps you will help yourself be prepared for the possibility of an IRS audit. While no one can prepare themselves for the circumstances that Mr. Treadway and Ms. Lojeski encountered, by audit-proofing your return, you not only save tax dollars but you will also give yourself significant and invaluable peace of mind. That's not to say that you won't be nervous about being audited; you just shouldn't be terrified about it any longer. The information given here should ease a lot of your anxieties about what formerly was a mysterious event.

Next Section: Popular Misconceptions About an IRS Audit - Audit Misconception #1

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© 1986, 1998 to 2002, Jack Warren Wade, Jr.