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Avoiding Penalties

A large number of returns are filed every year. Some of these are audited for discrepancies. A mathematical formula with weights is used to determine the chances that the tax deficiency is high. The returns are ranked in accordance with chances of error.

Mostly, the probability of you being audited is low, unless you are a high income tax payer. The factors that determine if you will be audited include:
1. Your profession
2. The returns you have filed
3. Your transactions
4. The place you live

In specific cases we see causes of audit like:
1. Incorrect information
2. Losses
3. Complex transactions
4. You deal in large amounts of cash
5. Your expense levels are high
6. You charity levels are high
7. Prior audits

If an error is found, you will have to provide additional information. If an audit is required be prepared with your documents and the experts like the attorney and CPA. If you do not come through the audit you might face penalties. A penalty of 20% of the amount in question is applied for:
1. Not following the rules
2. Stating a lower tax liability
3. Incorrect valuation of property

This penalty can be waived if sufficient cause is shown. Otherwise, you have to pay the deficiency, the penalty and the interest.

There are higher penalties for incorrect information about charity, tax avoidance and not reporting of transactions. You can dispute the audit, make an appeal and go to the court. The best policy is to be honest.

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