Ways to Avoid a Tax Audit

The word tax audit sends a shiver down the spine of most tax payers. The good news is, only about 1.5% percent of tax returns have been audited in recent years. There are several things you can do to make sure you are not one of the unfortunate few who have to endure a tax audit by the IRS. In most cases, the IRS uses a computer to flag tax returns for closer inspection. If you know what red flags the computer looks for, you can reduce these and minimize your risk of a tax audit.

Be Accurate and Honest

Report all of your income completely and honestly on the correct forms. If you have multiple streams of income, like tips, freelance work, interest or stocks, it can be easy to leave one out. However, when the organization sends you your 1099 or W2, they also send a copy to the IRS. You want to make sure your numbers match theirs. If you accidentally leave something out, the IRS will usually just ask you to correct it, but it does mean your tax return will be inspected more closely.

Make an average amount of income each year. If you report significantly less income than others in the same profession, your tax return may be flagged. Making a high income will also increase your chances of a tax audit. In general, individuals who make more than $100,000 each year have a greater tax audit risk.

Keep your deductions reasonable and accurate. Excessive charitable contributions or business deductions may cause your tax return to be flagged for an audit. Be especially careful if you are claiming the home office deduction because the requirements for this are very specific. Also, claiming losses year after year for your business may trigger an audit. This doesn’t mean you can’t claim all of the deductions you qualify for, but do be aware of how much you are actually claiming and how that compares to others in your income bracket.

Claim Qualified Dependents

Only claim dependents you are entitled to. If the number of dependents that you claim on your tax return varies from year to year, you could be audited. Also, make sure the dependents you claim are not claimed on someone else’s tax return. For example, if you are in the middle of a divorce or separation, make sure you and your ex come to an agreement about who gets to claim the children.

Check and double-check your tax returns for mistakes. If you do make a mistake, the IRS will usually catch it and either correct it themselves or ask you to fix it. Most of the time mistakes won’t land you with an audit, but they do make your tax return more noticeable. If you make a lot of mistakes, your tax return may be pulled out for closer inspection.

E-file Your Taxes

E-file your tax return instead of filling out the form by hand to avoid making mistakes. The online tax preparation programs do the tax calculations for you, so there is less chance of error. Also, if you mail in your form, whether you filled it out by hand or used a program, someone will need to enter it into the computer at the IRS. This person may make a mistake while entering your numbers or may have a hard time reading your handwriting. You can minimize the chance that you will have errors on your tax return and be flagged for an IRS audit by E-filing your taxes.

Make sure the information on your Federal income tax return matches your state income tax return. If there are any discrepancies, your tax return will be pulled and reviewed to find out where the error is. Also, don’t round your numbers because this tips off the IRS that your tax return may not be accurate. Very few real world values end up as round numbers. If you made a charitable contribution with a value of $395, then report it as $395 not $400.

In general, you want to make sure your tax return doesn’t vary to far from the norm because tax returns that stand out are often flagged for review. While there is still an element of chance involved, you can avoid being audited by making sure your tax returns are accurate and you have claimed only the deductions and credits you are entitled to.