More data can lessen chance of tax audit

NEW YORK — You don’t have a nanny or any other household help, nor are you chauffered around in a limo with a personal driver supplied by a friend.

That may make you eligible for a political appointment, but it doesn’t shield your tax return from an audit.

Yet if the fear of an audit has you paralyzed as you’re preparing this year’s 1040, you can take comfort in the fact that such reviews are relatively rare, and most often involve only the exchange of a few pieces of mail.

Nearly 1.4 million individual returns were audited in 2008, or “examined” in Internal Revenue service parlance, up about a half percent from the prior year. That represents just over 1 percent of federal returns filed in 2007.

The likelihood of an audit increases for higher income earners. While less than 1 percent of all returns for incomes under $200,000 are examined, IRS data shows nearly 3 percent of returns for incomes over $200,000 were reviewed last year. The figure climbs to almost 5.6 percent of returns for incomes of $1 million or more.

Still, the majority of examinations, almost 78 percent, involved only letters sent to taxpayers seeking more information.

Known as a correspondence audit, Bob Scharin, senior tax analyst from the Tax &Accounting business of Thomson Reuters, said such queries are generally easy to handle. “Some people don’t think of it as an audit, because they’re not physically seeing the IRS representative in an office,” he said.

Scharin said taxpayers receive such letters when something doesn’t match up in IRS records, or when a deduction seems out of line. “The computer could kick out the letter because something didn’t match up,” he explained, for instance the amount of income listed on a 1099 form that the IRS received doesn’t match the amount you claimed. Or the IRS might want documentation to back up a deduction, for example, for a large in-kind donation to charity.

Jay Safier, a principal in the New York accounting firm of Rosen, Seymour, Shapss, Martin &Company, said one way to avoid such a letter is to include documentation supporting a claim like a big deduction with your return. “If you attach it, it reduces the chance that the return will be audited,” he said, noting that returns are looked at by an individual before it’s determined they will be audited.

5 common reasons for a tax audit

Mathematical errors.

Differences between documents and returns.

Unusual or large charitable deductions.

Home office deductions.

Self-employment.