The Top 4 Things to Do to Avoid an Audit

What you need to do to avoid a tax audit by the IRS.

Mar 22, 2014 at 9:04AM


Source: The Motley Fool.

The phrase "IRS audit" strikes fear into the hearts of taxpayers everywhere. The last thing anyone wants is to be audited, but fortunately, there are simple things you can do to avoid an audit. Follow these four steps to put luck on your side and reduce the chance of being audited.

1. Check your work
One of the easiest ways to avoid an audit on your tax return is to make sure that all the information you enter is correct. The IRS has a sophisticated computer system that can compare the information you enter with the data reported by your employers. This means that an erroneous figure can put your return in the audit pile. How can you be extra careful? Try waiting to do your taxes until you get all of your tax information for the year. When you stagger your work, you may make more mistakes. Using e-filing software can help mitigate these problems, as the software will run a final check to look for discrepancies. Finally, don't send your return off until you have double-checked your work. Taking one last look at your return could help you avoid errors.

2. Make reasonable deductions
IRS analysts are trained to scrutinize deductions. They know what deductions are most common and which are most likely to be abused. A favored end-of-the-year tactic for many is to make charitable donations. While donating to charitable organizations is admirable, excessive donations can be a red flag, because the IRS knows what donation amounts are reasonable for certain income levels. Deductions for work expenses are also something that the IRS keeps an eye on. Be sure that if you deduct expenses for a home office or vehicle, you truly are using said office or car solely for business. The IRS takes extra care in assessing these types of deductions.

3. Be honest
Misrepresenting your income or deductions will certainly land you in audit territory. Because employers are required to report what they paid you, it is fairly simple for the IRS to determine whether you have faithfully reported all your income. Include all accounts, including foreign bank accounts, in your tax return. Don't try to tell the IRS that your video-gaming room is a home office that you use only for business .

4. Use tax software. It might sound frivolous, but letting tax software do the heavy lifting for you typically results in a more complete and accurate tax return. Tax software automatically calculates your return, reducing the possibility of mistakes. It also knows which deductions or credits you can claim together, so you won't end up trying to claim competing options. Tax software guides you through the return process so that you can make the best choices without making mistakes.

Bonus: Be average
For most people, audits are a remote possibility, as the IRS only audits about 1% of returns. However, taxpayers at either extreme of the income spectrum are more likely to be audited. In 2013, 10.9% percent of audits were selected from taxpayers with incomes of more than $1 million. Returns with incomes between $200,000 and $1,000,000 are about three times more likely to be audited than average. Because the IRS closely examines errors related to the Earned Income Tax Credit, people with lower incomes are also more likely to be audited.

Of course, there's not much you can do about this one before April 15. However, if your income puts you at a higher risk of being audited, consider taking extra care when filing your taxes.

Keep more of your money
Tax increases that took effect at the beginning of 2013 affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "How You Can Fight Back Against Higher Taxes," the Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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