When the IRS decides to audit you, there is not much you can do to prevent it. However, you can reduce your odds of being audited in the first place and/or prepare for the audit.
In general, audits are rare so that the majority of Americans will avoid them during their lifetime. According to the IRS, the percentage of taxpayers who get audited is very low. Since 2008, the number of people audited has slowly increased. Individuals and joint filers earning under $200,000 normally avoid scrutiny by the IRS.
If you want to avoid getting an audit notice after you file your tax return, you need to follow some simple guidelines when you are preparing your return.
The most common tax return red flag is erroneous data entry. Double-checking your tax return is an easy way to prevent audits. It seems surprisingly simple; however, often taxpayers get lazy and careless so they do not take time to go over their return to make sure everything is entered correctly.
Before you start preparing your tax return, make sure you have received all of your investment and bank statements, financial records and income reports. You can avoid making simple mistakes that can occur if you forget to record income or expenses because you do not have all of your forms gathered.
The IRS has an automated system that detects discrepancies easily. That is why it is important to correctly report exemptions and dependants in addition to making sure all of your numbers match.
This might seem like common sense but the best way to reduce your chance of getting audited is to be 100% truthful when you file your tax return. If you do not report all of the income you received, you will surely attract the IRS’s attention. If you lie about the amount you make or try to hide cash, you highly increase your chance of being audited.
Itemized deductions that are unrealistic or unusual may be a red flag for small businesses and individuals. If your costs are not normal, it could draw the IRS’s attention. For example, most taxpayers do not give 30% of their income to their favorite charity.
Sole proprietors filing a Schedule C, detailing business expenses and profits, who report losses for 3 or more years might prompt the IRS to perform an audit to prove that the person is really in business.
It is important that you understand what constitutes a legitimate tax deduction before you take it. For example, you cannot deduct mileage to and from your job but you can deduct it if you are meeting with a new client. In general, you can deduct anything you spend to make money.
You can drastically reduce tax return errors when you file your return electronically. This, in turn, lowers your odds of being audited. The Internal Revenue Service reported that there is a 21% error rate for mailed tax returns, while the rate for e-filed returns is .5%.
Even though the term “audit” is scary to most people, they are actually pretty rare. Most of the IRS audits are just requests regarding specific details on their tax return or asking for clarification. These are known as correspondence audits. These are relatively simple to be resolved if you have a proper backup of your claim. If you follow the above guidelines, you can avoid an audit altogether.