Tax audits

To ensure that you're well prepared in the event that you are audited, maintain good records and receipt files. These include any forms and statements that show income or support deductions (W-2s, 1099s, canceled checks, receipts, etc.) as well as copies of your return.

Under the statute of limitations, the IRS has three years in which to audit a return, so keep your tax records for at least that long.

Still, you might want to keep records for up to six years since that's how long the IRS has to come after you if you underreport your gross income by more than 25%.

But if you haven't filed a return and you owe money, or if you filed a fraudulent return, the IRS can come after you at any time.

Here are just a few ways to fend off an audit in the first place:

1. Report all of your income. The IRS uses an automated form-matching program to flag discrepancies between what you report and what the IRS has on file.

So be sure to report all income from your W-2s and 1099s on your federal return, since the IRS will have a duplicates of them on file.

Any discrepancies will trigger a correspondence audit. The IRS will send you a letter telling you how much more you owe based on the income you failed to report.

It's up to you whether to just pay the bill or challenge it if you think the IRS didn't calculate it correctly.

2. Run a small business? Prove it. If you report losses for several years, the IRS may start to suspect your business is more of a hobby.

And that may trigger a field audit, which is in-person and more onerous than a correspondence audit.

To prove yours is a real business, keep records of your business expenses and document how much time you spend on the business and what you do with it.

3. If anything seems weird, explain it. The IRS has its tentacles up for unreported income, so explain anything that looks questionable.

For example, if your net income is too low to live on given such factors as where you live and your family size, include a disclosure statement detailing how you supported yourself, including any savings, loans or credit cards that you used to pay the bills.

4. Watch the home office deductions. Typically your office is in one place -- either in a rental space or in your home. So don't report a deduction for both. (If you legitimately have offices in both places, explain why in a disclosure statement.)

If your rental expense is for a business storage unit or equipment, label that cost as a "storage rental" or "equipment rental."

5. Report money overseas: U.S. taxpayers who have bank or investment accounts abroad must report any income they earned on those accounts to the IRS.

Under the Foreign Account Tax Compliance Act (FATCA) your foreign financial institution may soon start to report that information to the IRS like any U.S. bank or brokerage would.

If you've had the account for years, never reported it, and the IRS finds out about it from your foreign bank, you could owe back taxes plus huge penalties.

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