Reduce the Likelihood of an IRS Audit
While there is no guaranteed method for avoiding an IRS audit, there are many simple and effective strategies that can significantly reduce the risk of an auditor knocking on your door.
Do your tax returns accurately. Always check, then double check, all of your math. About 20 percent of all manually filed returns contain at least one mathematical error. Returns that are filed online, however, have an error rate of about half a percent. While mathematical errors don’t automatically mean you’re going to be audited, they do tend to raise red flags with the IRS.
Substantiate, substantiate, substantiate! The majority of individuals selected for audits are picked by a computer program that compares an individual’s deductions to those of other people in the same income bracket. So, provide proof of any unusual deductions on your return with documentation that they’re valid.
Let’s say you make $30,000 a year and you deduct $50,000 in charitable donations. This may flag your return because the size of the donation is larger than your income. When an IRS examiner inspects your return and sees that you have included documentation for that large donation, it is unlikely that he or she will be knocking on your door anytime soon.
Be careful if you’re self-employed. Self-employed individuals, especially business owners, are among those most likely to be audited, particularly if they get paid in cash or tips. The IRS looks very carefully at unusual and excessive deductions or complicated corporate structures that may be designed to reduce income. This is especially true for individuals with offshore accounts.
Pay the penalties on any early retirement plan distributions. If you are under the age of 59&fraq12; and you withdrew money from an IRA, 401(k), or other qualified plan without paying the 10-percent penalty, you increase your chances of an IRS visit. The IRS gets your 1099-R form, so they will be well aware of any penalties you have neglected to pay.
When in doubt, wait it out. If you can’t complete your return on time, file an automatic extension request. An extension does not increase your risk of being audited, and it may even save you from late penalties.
Keep it neat. This is also where it helps to file online. If you cannot use a computer, print as neatly and carefully as possible. Messy tax returns may give the impression that you are careless and disorganized—and this may increase your chances of being audited. The social security numbers of you, your spouse, and/or your dependents should be clearly legible and double-checked for accuracy.
Always tell the truth. The most important thing you can do to avoid an audit from the start is to report all the required information from every W-2 and 1099 form that you receive. The IRS receives duplicate copies of these forms from your employer, so, if the numbers don’t match, you may also be fined on top of the amount that you already owe.