Chances are, if you are audited, it will be to focus on one or two areas of your tax return and not the entire thing. Something about the way your numbers line up – or don’t – will trigger an alert in the system that your report should be reviewed. In our situation, we were still living in deep debt and used credit cards and loans to supplement our income. Since our expenses and deductions were far more numerous than our income statements, an audit was required to see what was causing the difference because in the mind of the computer, it was not possible that we could be spending what we said we were spending on the amount of income we were reporting.
What You Need for an Audit
One of the scariest parts of being audited by the IRS is not knowing what exactly they want to see, but the letter you receive will list an exact detail of what to have ready. However, one thing is standard… copies of your bank statements for every account you have.
I can tell you from my experience that keeping track of every dime of your income is excruciatingly important. We literally had to go step by step and day by day through our bank statements and account for every deposit, whether it was a gift or cash or line of credit. Every drop of income had to be described in detail.
Other Helpful Items
If you are wondering what else if needed to be prepared for a visit by the Internal Revenue Service, consider these items:
Previous tax returns
If you cannot balance the return being audited with a simple explanation, previous year’s returns can be opened. Hang on to your tax returns and corresponding documents for 7 years before disposing of them.
Business trip itineraries, receipts
If you travel for business frequently, keep proof of any conferences or meetings you attend. Our business trip to Chicago sent up a major flag and I had to shuffle through a pile of scrapbook keepsakes to find the conference schedule and my lanyard.
Copies of deposits
I love that my bank now offers the convenience of printing the check images on ATM receipts. Now, I know exactly what the deposit was and how it should be reported. I can define which deposits were checks or reimbursements and not have the stress of remembering each tiny detail five years later.
My Best Advice
My husband and I had always tried to be completely honest and forthcoming on our tax returns and while we made major mistakes in how we filed, I believe that God honored the intentions of our hearts and we were cleared of any additional debt to the IRS.
When I am asked what my best piece of advice is for someone who fears an audit, I can easily say, “Be honest and above reproach from the very beginning, when you are filing your returns the first time.” If an audit happens, it is much better to know you did your best than to fear your hidden agenda will be found.
Having financial freedom isn’t a simple task. It won’t happen overnight. If your finances are already in bad shape, they certainly won’t fix themselves. Unfortunately, this time of year, many people squander opportunities to gain the financial freedom they crave, or at least lay the foundation for it.
Many people look forward to this time of year because it brings with it the anticipation of tax refunds. No matter the amount, many people use their refunds to “treat” themselves or to make large purchases they may otherwise not be able to afford. However, before we go rushing to the banks to cash in our new “windfalls”, we should take some time to consider how our next move(s) may affect us.
On one hand, making large purchases with cash is certainly better than using lines of credit or loans. Any time you can use cash to make a purchase, it frees you from the “bondage” of debt. Since our goal is financial freedom, avoiding “bondage” is a great start.
On the other hand, perhaps we should be viewing these refunds as opportunities to create security for ourselves long-term and not simply for impulse shopping or spending money on the new trends. Unless a large purchase is truly necessary (like a new car or down payment on a home) it is likely that a year from now, or five years from now, it will be inconsequential. Consider investing to help to create a positive and long term financial future for yourself and your family.
Begin viewing money, in any amount, as an investment opportunity instead of as something that is disposable. While we all look forward to times of prosperity, we must take the time to make smart decisions.
This country is financially blessed; much more so than many Americans think. We have access to money and the rights to earn it. Even in difficult times money is still there, it just might take on a different form.
Bartering is a great example of this. Bartering has become increasingly popular with the down turn of the economy and I think that this is a really good thing. We should think about money the same way we view bartering. The idea behind bartering is that we can only get what we want by using what we already have. You wouldn’t borrow your neighbor’s lawn mower to trade for a dirt bike that you want for yourself, right? Why not? Well, then you would be indebted to your neighbor for a lawn mower. This is a great way to think about money, too.
We can only get what we want by using what we already have.
We need to teach our children how to respect money. We must encourage them to set goals (perhaps there is an item they want to save for or a place they’d like to visit) and to understand their role, and rights, as a consumer. They need to have a sense of responsibility when it comes to the financial well-being of their country and know how to be a positive contributor to it.
Throughout the history of the United States, the American Dream has been the epitome of achieving prosperity through hard work and education. The belief was that if you worked hard enough, you could become anything you desired to be. (more…)