Audit Insurance

[this was originally written by me for the Wide open Wallet)

Everyone hates the thought of an audit. So here I am to provide everyone with Audit Insurance.

What this insurance will do? It protects you if you are audited. Protect you so well that you are guaranteed to walk out a winner, if you are ever audited. Best part, this is free, no agents.  What I am talking about is no secret and I have a web page devoted to this. It is called ‘The Envelope System‘.

I am guessing I have your curiosity up somewhat so let me get into the meat of it. The ‘Envelope System’ has been around for years, in many forms and with the technologies now, you can make this very easy. Aside from a minor expense of a few envelopes, and a few minutes of time every so often, this is free and will assure you complete audit protection.

How it works is simple. Keep receipts of everything.

Let me throw this in from my site, “As you get your receipts, put them in a shoebox or a special file. Each month when you reconcile your checkbook, break down those receipts into categories and create an envelope for each category.” These categories are going to be things on your Tax Return Such as:

1.      One for charitable contributions,

2.      another envelope for medical expenses,

3.      mortgage interest,

4.      work related expenses, etc.

If you can’t think of a category, make up some descriptive name and use that (or contact me for an idea) so you can tell your preparer.

Add up the receipts for each category (be sure to only add them each once), and put the sum of that category on the outside of the envelope. At the end of the year those are the numbers you give to your tax preparer. {The idea is not to just throw the receipts all in one envelope and turn them over to your preparer. We don’t mind it so much, but save yourself some of money.}

Now this achieves several of your goals with little effort.

Your preparer now has final numbers for each category. Your preparer will tell you what’s not allowable, and more quickly and accurately complete your return. When s/he is done s/he will analyze it all.

Get ready for questions from your preparer. Anyone over seven years old can put numbers in boxes. You’re preparer has the knowledge and insight as to where to put those numbers and what expenses are allowable. The more your preparer knows about you, what you do and where you want to go, the better the service you’re going to get.

So how is this insurance?

A tax audit is nothing more than the IRS requesting authentication for what is on your return. The numbers on your return come right off the envelopes for each category.

So, for example, if you’re audited on your medical expenses, you have to prove that number. Not a problem for you. Just give your preparer/representative the “medical expenses” envelope. It will have all the receipts and checks to substantiate the number/s on your return. Remember, the numbers on your return came from the receipts and checks in each of your envelopes.

You’ve already pre-audited yourself.

Look back at my post Avoid a Tax Audit with these tips for more information.