This seems to be an increasingly common scenario: IRS audits a self-prepared tax return and discovers errors taken on deductions1. The taxpayer is assessed additional taxes and penalties. This increases the probability that the following year’s tax return will be audited for the same issues. On the following year the taxpayer typically takes one of three paths:
A poor approach: The taxpayer recalls the stress and penalty and decides to not take the deductions at all. This means conceding to pay higher than required taxes.
Another poor approach: Do the same thing as the prior year and worry about triggering anther audit.
The best approach: Have a credentialed professional prepare the following year’s tax return, compete and review the due diligence worksheets and compliance checklists and have backup documentation (receipts and other records) prepared and stored electronically along with the tax preparers records. This approach minimizes the legal tax liability, reduces the risk of audit and ensures that a subsequent audit will not be a stressful experience even if it recurs.
1 Despite our criticism of IRS technical capabilities in other areas, the Service has proven skilled in identifying self-prepared tax returns that do not meet legal requirements for taking various types of deductions.