Are You Ready For a Tax Audit?

The tax department may call you and send you a letter telling you that they are coming to do a tax audit. It is an examination of your tax returns, especially for those who are in business, to make sure that you have reported correctly your income and expenses and paid the correct amount of tax. Like fighting a legal case, whatever you have reported, it must be properly supported by documents.  Here are a few things you must observe and watch out for:

Income:

·         Properly numbered bills in running sequence: Any cancelled bills are intact and not to be destroyed. If your bills are without numbers it can be an indication that you are trying to hide some of your business income and report an amount lower than what you have actually collected. Throwing away cancelled bills is a no-no because it is subject to the same suspicion.

Expenses:

·         Documentary evidence: Like in a court of law, your reported expenses must be supported by invoices or bills. As an example, you advertise for your business and you support your payment with a bill. It would be even better if you could attach a copy of the advertisement.

 

·         Vouchers: You must clearly state the full details of each and everyone when you make payments to individuals.   

Why the tax department call on you? These are  few of them  valid reasons:

  

•    Errors: One of the reasons cited by the IRS is that some people are poor in mathematics and the figures do not add up.  So, they are subject to investigation.

[On filing for tax returns] This is too difficult for a mathematician. It takes a philosopher. ~ Albert Einstein

•      Red flag:  Earning a monthly income of $2000 but paying a mortgage of $1800. Do you mean you don’t have to eat and live? 

•          Income: Having income not reported or income under-declared is asking for trouble. Living a lifestyle beyond your reported income is a sure way to catch the attention of the IRS.

So, are you ready for a tax audit?