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Audit-Proof your Return
How to audit-proof a tax return
Audit-proofing techniques can be used effectively to prevent
audits, penalties and the wasting of time. The techniques are
simple -- especially since the IRS produces a special
audit-proofing form you can use. Audit-proofing is based on the
principal of providing with your return the information relevant
to a claim in your return. You provide information for claims
you think could raise a red flag and cause an audit.
Charitable contributions, mileage claims for a small
business, unusually high entertainment costs, a home office
reduction, or unusual medical expenses are among those
deductions that are highly scrutinized.
By providing proof in the case of a potentially suspect
deduction with the return, you eliminate the need for the return
to be audited. Proof may include copies of canceled checks,
copies of receipts, or an affidavit explaining how you arrived
at certain deductions.
Form 8275 is a form the IRS would rather you did not know
about or use. It is called the Disclosure Statement. When filed
with the return, it calls attention to a claim made and says "I
claimed this based on these specific grounds." In short, it
allows you to prove your claim without going through an audit.
By proving your case before an audit, you greatly reduce the
need for an audit, and the scope of an audit if there are other
claims called into question later. The IRS would rather not
audit those who are informed and prepared to quickly respond .
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Charitable Gifts
Appreciated assets/charitable gifts
Both you and a charity can benefit if you give appreciated
assets to the charity instead of selling the assets and donating
the after-tax proceeds. The amount of the savings will depend on
how much capital gains tax you would have paid on the sale. For
example, suppose you are in the 39.6% bracket and plan to make a
charitable gift of appreciated securities worth $100,000 with a
cost of $40,000. You must choose between gifting the securities
outright or selling the securities and gifting the cash
proceeds. The gift of stock allows you to permanently avoid
$12,000 of tax on the appreciation ($60,000 appreciation 20%
capital gains tax rate).
At the same time you could deduct the $100,000 as a charitable
contribution and save $39,600 in taxes through itemized
deductions against your other income ($100,000 deduction 39.6%
marginal tax rate). The deduction may be carried over for up to
five years.
That amounts to a total savings of $51,600 ($12,000 tax avoided,
plus $39,600 tax savings).
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