Illustration By Ingo Fast
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4 Essential Rules for Avoiding an IRS Audit
By Diane Harris, March-April 2003
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If filing taxes is like a root canal, an audit is like having your jaw removed. To make sure you're not singled out for extra Internal Revenue Service scrutiny, avoid these four common audit triggers:
The Kiddie Switcheroo. If you're divorced, the IRS allows only one parent—usually the one the child lives with—to claim him or her as a dependent. If your child doesn't live with you most of the time, you need a tax waiver signed by the custodial parent to take the write-off.
The Tiny-Earnings Dodge. While you might think it inconsequential to report a few dollars in interest from a long-forgotten bank account or a tiny fee for a minor consulting project, Uncle Sam does not. Carefully gather any year-end financial statements you receive and report that income, however small. An easy rule: If it's on a 1099 form, the government knows about it and expects you to report it.
The Cash Grab. Not paying Uncle Sam for a lump-sum retirement-plan payout is a common mistake. If you or your employer rolls over the distribution into an IRA or similar tax-advantaged retirement account within 60 days of the payout, you're probably okay. Otherwise, you owe taxes on the full amount—maybe even at a higher rate.
The Benefit Boo Boo. Eighty percent of Social Security recipients don't owe taxes on their benefits. And while you may not be getting those benefits, your parents are—and you may be helping them handle their money. So if, say, your father is a single filer with income exceeding $25,000, or if he and a spouse file jointly with income greater than $32,000, he may be taxed on a portion of the amount he gets. Check with an accountant or IRS Publication 915 (available at www.irs.gov) to find out what constitutes income in this context.
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