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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.

Be neat!
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.

Be accurate!
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.

Document deductions!
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.

Be square!
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.

File late!
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 small!
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:

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. 


Read/Post Comments (6) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 27, 2010, at 10:53 PM, jram68 wrote:

    I cant believe you ripped off this guy's article: http://public.findlaw.com/taxes/audits-tax-problems/tax-audi...

    I guess Bloggers have no shame...

  • Report this Comment On November 08, 2011, at 1:30 PM, Dresden83 wrote:

    # 2 (Be Accurate is best). Many consumers often falsify the tax returns which of course can result in audit. Another common mistake, is when two parents both claim one child (only one or the other should do this). As always, its a good idea to write off as much as you can through tangible receipts. Dresden @ http://www.consolidate-debts.com

  • Report this Comment On September 07, 2012, at 2:38 PM, johnt66 wrote:

    I intend to sell a savings bond with F&C for about £5000 to put towards a vehicle purchase. This cost £3000 in 1998,and I I had blitheley thought I would be exempt from tax through the capital gains tax allowance. However I have been told that I will be liable for a 20% deduction on the profit or even the whole £5000. What is your view? I am a pensioner who pays standard rate tax. Any suggestions for legally avoiding tax, this is not in an ISA.?

    Thanks

    John

  • Report this Comment On February 06, 2014, at 6:41 PM, Sophiaevans wrote:

    This is such a great post. I'm always nervous when tax season comes. I always try my best to be honest, and to correctly fill out all the forms, but sometimes they are all so confusing! I don't make the mistakes on purpose, but sometimes I worry that I fill things out incorrectly .

    <a href='http://www.socialsecurityesq.com' >

    Bruce K Billman</a>

  • Report this Comment On March 27, 2014, at 12:53 PM, konradwithak13 wrote:

    Great article! I had no idea that there were certain areas that were more likely to get audited as compared to others! I have always filed via computer, and so far have never had an issue. Fingers crossed for this year!

  • Report this Comment On September 20, 2014, at 1:13 PM, julianuk wrote:

    Those tips will come in very useful, thanks!

    -Julian

    Webmaster http://www.howtoincreasepenisnaturally.net

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