Don't Live in Fear of an IRS Audit #financialplanning #tax
According to the IRS, the chances of you being audited are about 1 in 160.
You likely have experienced fear of a tax audit at some point in your life. Here ‘s how to protect yourself.
If the Internal Revenue Service suspects you underreported your gross income by 25% or more, it can challenge your return for up to six years. If the IRS suspects you filed a fraudulent return, no statute of limitations applies.
Guilty Until Proven Innocent
When the IRS challenges your return, the burden of evidence verifying your claims rests entirely with you.
If you haven’t been traumatized by an audit, you probably keep little of your financial documentation. If you have, you’re probably terrified to part with a single receipt. The IRS is one of the few courts where failure to produce proof of your claims results in the assumption that you stand guilty.
Here are ways to protect yourself:
· Save all financial documents used to create your tax return.
· Retain a paper copy or receipt of any tax-relevant financial exchange. Scan these documents and archive them electronically or acquire them in an electronic format.
· If the purchase constituted a business or other deductible expense, record the expense and why it justifies the deduction. Store this information with the receipts.
Know Your Cost Basis
For a mutual fund with years of reinvested dividends, each dividend payment is part of the cost basis. As a result, sometimes you can compute the cost basis only if you access the complete transaction history.
Many custodians keep several years of electronic copies of brokerage statements and must send any known cost basis when you transfer to a new custodian. If your current custodian has the correct cost basis of your securities, you probably no longer need to keep brokerage statements. Better safe than sorry with the IRS, though.
Permanently keep records of nondeductible contributions to your individual retirement account. You may need the records every year in your retirement that you withdraw money to show that a portion of the withdrawal is not tax deductible. To avoid the hassle, consider clearing out nondeductible IRA contributions by converting your IRAs to Roth accounts.
Keep partnership documents, contracts and commission or royalty structures forever. This includes property records, deeds and titles, especially those relating to intellectual property. It also includes transfers of value for estate planning.
Save all your tax returns. After you file, save the paper or electronic copies, or both, with the rest of that year’s documents.
Once a year, scan and compile the records into PDFs and send them electronically to your financial advisor and the certified public accountant who does your taxes. Scanning the information gives you an electronic backup of the paper indefinitely.