Written by Chris Cooper, CFP® | March 26 2012

Many people have asked the question, "How is my tax return selected for an audit?" Well, audits are often random. The IRS really never tells us exactly how it actually selects which tax returns to audit. However, we do know that certain tax returns are going to be audited more often than others.

If you own a business, especially if it's an unincorporated business such as a sole proprietorship and you file a Schedule C with your 1040, your tax return is more likely to be audited. That's because Schedule C filers tend to have the least compliance with tax law. Simply put, they cheat more often, so whenever there's income or revenues from the business over $100,000, the incidents of audit on those tax returns goes up quite dramatically.

Now, all audits are not necessarily alike. There are basically two types of audits: a correspondence audit and a field audit. In the correspondence audit, you'll get a letter in the mail where the IRS says, "We'd like you to prove the following items that you listed in your tax return." The IRS might simply ask you to provide documentation of those questionable items via mail. Often, this type of audit wraps up very quickly with some basic correspondence.

It's important not to mistake a correspondence audit for an error letter, which the IRS calls a CP2000 notice. You get that notice because the IRS computers aren't necessarily matching up your reporting documents. For example, let's say you have five different bank accounts but you don't list all five of them on your return. One of the missing accounts has interest greater than $10, and so you get a letter in the mail saying, "You reported your income as this but your real income was something greater."

In this situation, the IRS can automatically assume you're guilty until you prove yourself innocent. You might get really angry and think, "Well, how dare they?" But what you do then is just simply match the documents up, attach all the 1099s to the correspondence and return it and generally that clears everything up. However, that situation just involves matching reporting forms like 1099s and W2s and bank interest and mortgage interest. That's different from a correspondence audit, where the IRS might be asking you to document what you paid in rent for your building, what you paid for car expenses or what you paid your employees. In that case, you'll need to provide copies of the W2s and other documents. That's a more difficult situation and is actually more of an audit.

The more difficult type of audit is the field audit. If you're the subject of a field audit, you'll be informed via letter that an auditor from the IRS is going to come and see you in your place of business or in your home. In these situations, you definitely do not represent yourself. Instead, you want to hire someone who can represent you before the IRS and who knows how to protect your rights. As far as representation, you basically have three choices. First, you could hire an attorney who is familiar with tax law. (Remember, not all attorneys do tax work; they tend to be surgeons―they have specialties.) Two, you could hire a Certified Public Accountant. A CPA is licensed to represent you before the IRS. However, not all CPAs do tax work; you need to make sure that the CPA you hire knows how to handle your type of return. Third, you could hire someone called an enrolled agent. Enrolled agents have been tested and certified by the Treasury. They've taken an exam and are licensed to represent tax payers before the IRS as well as state and local taxing authorities.

Any of professionals can help you if you're facing an audit. The important thing to remember is that if you're the subject of a field audit, you want to have representation, because in that situation you definitely need someone to watch your back.

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Written by Chris Cooper, CFP® | March 19 2012

Because 2012 is an election year, many people have been wondering, "How do elections affect financial markets?" One of the things that's interesting about election years is generally they are the more predictable years of the stock market.

When we look back at history, we find that during Democratic administrations but mixed Congresses (where one body of Congress is majority Republican and the other is majority Democrat) the stock market seems to perform best―it gives us the best overall average stock market returns. On the other hand, when we have a Republican administration, Republican president and a Republican-controlled Congress, we tend to have the least impressive stock market performance. However, in that situation we tend to get lower interest rates. That's what we've been experiencing over the past 10 years―low interest rates and pretty much low growth.

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Written by Chris Cooper, CFP® | January 16 2012

While the image of a happy family where everyone always gets along is pleasant, this simply doesn't represent reality for many people. Take the story of a brother and sister that I knew. As children, these two siblings had never really gotten along, and as adults they'd become estranged. Eventually, however, it became clear that they were going to have to come together to deal with the needs of their elderly mother, who had severe dementia and could no longer live independently. Unfortunately, each had different ideas about the kind of care she really needed. 

The sister had found a family home where she thought her mom could live. It was a small place with just six beds. A couple ran the facility, and there were no nurses or other medical professionals on staff. The home only cost $1,000 a month, which was a big plus in the mind of the sister. However, when the brother came into town to deal with this issue, he had a different idea about what would be best for the mother. This visit was the first time he'd seen his mother in many years, but he realized right away that something was definitely not right. Even though he wasn't that involved in the family, he saw that his sister's idea wasn't the best. That's when he called me to set up a meeting with him and his sister to talk about how to care for their mother.

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Written by Chris Cooper, CFP® | January 09 2012

Often, when people get older, they do everything they can to hide the fact that they suffering from health problems or diminished mental capacity. Take the story of a man I knew and his elderly father.

The son was a lawyer. He worked as a litigator, and he didn't have any expertise in elder law or financial matters. Recently, his father had fallen in the home that he shared with his second wife, the son's stepmother. The father had sustained some fairly severe injuries and needed to be hospitalized. Because the second wife had no experience handling the finances, she asked the son to step in and figure out where the money was so she could pay the bills. The son quickly discovered that the father had purchased an annuity from an insurance salesman at a local bank. In fact, the father had tied up almost his entire net worth―about $2 million―in annuities.

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