Just hearing the word “audit” is enough to send chills down the spines of even honest taxpayers. Although only about 1 percent of all federal income tax returns are audited, even those odds are too great for many taxpayers. While there is no iron clad guidelines that guarantee that you will avoid a tax audit by the IRS, there are several strategies that you can take that allow you to fly under the audit radar.
1. Triple Check Your Forms
Computational errors. Entries placed on the wrong line of a return. Forgetting to sign the return – all trivial mistakes. But trivial mistakes may result in erroneous credits or deductions, and all of a sudden those “little” mistakes aren’t so little anymore. You should also avoid rounding figures, even if it’s easier to calculate that way. The IRS looks at rounded numbers as estimates or possible fabrications. Estimates = audit red flag.
2. E-File Your Return
E-filing allows you to receive your refund faster and receive nearly instant confirmation that the IRS has received your return. Online or computer-based tax preparation programs also reduce the likelihood of math errors and misplaced entries on your return. Best of all, for the majority of taxpayers, e-filing is free.
3. Report All of Your Income
Sure, if you are entitled to a credit or deduction that reduces your adjustable gross income or decreases the amount of tax that you owe, go for it. No one is saying you should pay excess tax. But attempting to evade taxes by “forgetting” to report significant chunks of your income is just asking for an audit. Even if you dodge the audit bullet this year, the IRS statute of limitations is no less than 3 years. If you’re audited in year 3, after you’ve placed your records in deep storage, you’ll be hard pressed to make it through the audit without incurring stiff penalties. You’ve been warned.
4. Don’t Boast On Social Media
If you’re crying “poor” to the IRS to reduce your federal income tax bite, but bragging on Google+ and LinkedIn about how your enterprise is thriving, odds are someone at the IRS will note the disconnect. This doesn’t mean that you’re not allowed to use social media to promote your business. It does mean that you should remember that social media is essentially public, not private space – and conduct yourself accordingly. Don’t believe that the IRS is on social media? So did the so-called “Queen of tax fraud.”
5. Make Sure Your Business is a Business, Not a Hobby
Former NFL linebacker Bill Romanowski and his wife learned a $4.75 million lesson the hard way when the IRS ruled that their deductions for horse-breeding expenses were disallowed because the IRS viewed the venture as a hobby rather than a business. If you claim business deductions but declare little or no business income, the IRS may decide you’re not serious about making a profit from your enterprise.
6. Don’t Be Too Charitable
Charity is truly a virtue. But if your virtue outpaces your apparent disposable income, the IRS may conclude that your generosity is a cover for a tax dodge. If you really are giving away large segments of your worldly goods, be prepared to back up your claims with receipts and other documentation. The bigger the claim, the more detailed the receipt should be. A text message or notation on your bill confirming a $10 donation to the Red Cross from your cell phone is totally fine. But if you’re claiming a deduction for donating Aunt Gertrude’s Ming Dynasty vase, you’ll not only need a receipt, but also an appraisal of its value from a certified professional.
Related article: Claiming Tax Deductions for Charitable Donations
7. Keep Your Business and Personal Lives Separate
As an entrepreneur, you use your car for business trips and for the family vacation. Your computer does double duty for updating your personal Facebook profile and your company’s Facebook page. That’s fine, but it’s a good idea to maintain a detailed log outlining when you use the computer or car for business-related purposes to keep your business-related claims honest. And if at all possible, establish and maintain separate bank accounts for your personal and business lives.
8. Don’t Claim Odd Deductions and Credits
The Discriminant Inventory Function System, or DIF for short, is a top secret algorithm used by the IRS to flag outliers among federal income tax returns. The point here is to not stand out. Your ordinary return swimming among a sea of ordinary returns truly does make your chances of an audit slim to none. But if you call attention to yourself with odd deductions or unverified credits, don’t be surprised when the IRS takes notice – and contacts you for further info.
9. Don’t Stiff Your State Taxes
You know how you can deduct taxes paid to the state on your federal income tax return? Think about how that is possible, and then consider whether it’s really a good idea to trim your tax bill by stiffing your state income taxes. If your state decides to dig deeper into your tax returns, the odds increase that the IRS will get in on the fun, too.
10. Choose the Right Tax Preparer
If you are among the 60 percent of Americans who outsource their federal income tax returns, take care to choose the right preparer. Check out his or her qualifications and reputation in the industry. Ensure that you have a way to reach him or her if needed to respond to your questions – or questions from the IRS. Shady paid tax preparers who offer huge returns without asking for or obtaining any specific information about you should trigger red flags. Likewise, you should leave skid marks getting away from any paid preparer who instructs you to sign a blank or incomplete tax return.