Audit-Proof Your Tax Return
Is there really such a thing as an audit-proof tax return? A way of preparing your return to guarantee that you won't be subject to an audit? Of course not. But there certainly are ways to minimize your risk.
You don't want to thumb your nose at Uncle Sam, thinking that an audit won't happen to you. It just might, and if it does, you should be prepared. But what can you do to make your tax return less susceptible to the IRS' eagle eyes? Here are seven suggested strategies.
Consider preparing your tax return by computer. A neatly prepared, computer-generated return looks much better to the IRS staffer (called a "classifier") who will decide whether to audit your return. Virtually all reputable tax pros now complete their returns using computers, and there are a number of really good do-it-yourself computer programs for PCs and Macs alike. (For my do-it-yourself friends, I recommend TurboTax.) Some websites even allow you to securely complete your tax return from the comfort of your Web browser.
If you're unable to use a computer to prepare your return, at least print clearly and carefully. Don't decide to get your revenge on the IRS by preparing your return with a red crayon. A messy return -- cross-outs, sloppy handwriting, and smudges -- is like hanging a sign on your return that says, "Audit me!" It might also give the IRS the impression that you are careless and disorganized.
Remember that the IRS has stepped up its audit enforcement in recent years. The IRS believes that the taxpaying public has gotten an audit-free ride for years -- and that ride is now over. While it's still unlikely that you will be audited, the odds have increased substantially.
The only thing worse than a messy return is an incorrect one. By "correct," I mean that all of your numbers add and subtract accurately. This is another reason to prepare your return by computer, since you don't need to worry about a computer program flubbing any of the math.
Remember that your tax return will be loaded into the IRS computers, and those computers will check your return for math errors. If your return states that 2 + 2 = 5, they might start wondering about some of your other numbers. Don't give them a chance. Double-check your numbers before you mail your return.
Watch Schedule C!
Avoid filing an income tax return with a Schedule C (Profit or Loss for Business) that reports a net loss from a small-business venture. This is especially true when your main source of income comes from W-2 wages. IRS auditors go after these returns like politicians go after money. Why? In order for these business losses to stand up, you must pass both the "passive loss" and "hobby loss" rules. You aren't familiar with those rules? Neither are most taxpayers, and the IRS knows it.
If you claim large deductions for unusual items, such as losses because of earthquake, flood, or fire, attach documentary proof to the back of your tax return. Copies of repair receipts, canceled checks, insurance reports, and pictures are always a good idea. This won't stop the IRS computer from flagging your return, but the documents should catch the attention of the IRS classifier. If he or she thinks your documentation looks reasonable, you probably won't get audited.
Whatever you do, don't use round numbers. For example, if you report $1,000 or $12,000 instead of $978 or $12,127, it's an indication that you are estimating rather than keeping good records and reporting the actual, correct amount.
Again, the IRS will tell you that filing an extension will neither increase nor decrease your chance of audit. But I'm not so sure. Many tax pros commonly tell clients with some possible audit exposure to file for an extension, usually all the way until the Oct. 15 deadline. You also might want to wait to get your return into the audit processing cycle. Obviously, you must file valid extensions, and this gambit certainly works best for those who aren't expecting a refund. Just remember that if you have a balance due to the IRS, an extension of time to file is for the paperwork only ... not for the payment of the tax. You'll need to pony up your money by the due date of the tax return in order to avoid costly penalties and interest.
Live in a low-audit area. I'm not kidding! Audit exposure is different from city to city and state to state. Did you know that during one period, Nevada taxpayers were audited four times more often than people in Wisconsin? This doesn't necessarily mean that you should move to Oshkosh, but if you have several homes, travel extensively, or otherwise have some flexibility in selecting your tax-reporting address, consider choosing the one with the lowest average audit rate.
For more on preparing your tax return, read about:
- Acing your tax return in 60 seconds.
- Getting good professional tax help.
- Steps you can take to cut your taxes year-round.
- Deductions even the pros overlook.
- Things to organize before you crank out your return.
This article was originally published March 16, 2007. It has been updated.
Fool contributor Roy Lewis has never been to Oshkosh, by gosh. But he has been to many IRS offices where he represents clients before the IRS for making some of the mistakes noted above. He understands that The Motley Fool is all about investors writing for investors. He's a big fan of both TurboTax and QuickBooks. He's also a big fan of Fool's disclosure policy.