Though the chances you'll be audited by the IRS in any given year are low, someone has to make the list. And given that less than 1% of taxpayers are audited, those who are chosen tend to feel like they're being singled out, which is often untrue. If you got audited in 2015, it may have been a matter of sheer bad luck.
That said, certain mistakes and questionable items on your tax return do raise red flags. So if you want to avoid another ominous letter from your friends at the IRS, make sure you take five key steps this time around.
1. Report your income -- all of it
It's one thing to take liberties with tax deductions and try pushing the boundaries, but it's another thing to omit income on your tax return. If you've already been through the audit process because you failed to report all of your income, don't make the same mistake again. And it's not just job-related income you need to come clean about. Any money you make from interest or investments needs to be reported as well. This includes any interest you may have received from a savings account or certificate of deposit, dividend payments, and bond interest. Did you win a prize or award? You may have to report that as well.
So round up those 1099s, which will contain all the information you'll need to report, and list every last penny you earned. If your totals don't match what the IRS is seeing, you could wind up back on that audit list in no time.
2. Keep all your documentation and receipts
One of the best ways to get on the IRS' audit list is to estimate your deductions rather than calculating them precisely using documented figures. If that's what got you audited last year, learn from your mistake by keeping impeccable records this time around. Hang on to invoices, receipts, and pay stubs -- or, better yet, scan and store them electronically to make sure they don't go missing when the time comes to file your next return.
If you've already missed that boat for the purposes of your 2015 tax return, then you may need to do some backtracking in order to find the information you need, but it will be worth your while if it saves you the hassle of getting audited. Say you used your vehicle for business but failed to log your mileage. In that case, bust out your calendar and retrace your travels as precisely as possible.
Did you toss out all the receipts from those business lunches? Go online and comb through your credit card history, because credit card and bank statements are a good source of documentation in the absence of actual receipts.
Finally, if you donated cash or goods to charity and can't find your receipt, your only move is to call the organization and ask if someone can send you a statement. If so, you're in luck. If not, you may want to exclude your donation amount from your deductions. While it stinks to lose out on any sort of tax break, it beats provoking the ire of the IRS.
3. Have an accountant file your taxes
Though hiring an accountant doesn't eliminate your audit risk, it could help you avoid making an honest but glaring mistake that lands you back on the IRS' radar. If, for example, you got audited because you failed to report all your investment income, or miscalculated certain deductions, an accountant can help ensure that the same mistake doesn't happen again. Remember, too, that some tax preparers offer to represent you in the event of an audit. Sometimes audit support is included with the fees you pay up front, and sometimes it costs extra. Either way, you'll be happy to have a tax pro in your corner during the audit process.
4. Strategically lower your income
Statistically speaking, if you earn $200,000 or more, you're three times as likely to get audited as someone earning between $25,000 and $199,999. If you're hovering around that $200,000 mark and you can reduce your income, then you just might lower your earnings bracket -- and your audit risk along with it. Just be careful not to go overboard with deductions, as getting too creative could tempt the IRS to take a second look at your taxes once again. If you're self-employed, you can try deferring some income from this year to the following year. Otherwise, you may want to sell some investments at a loss to reduce your income, or delay cashing in on gains until the next year rolls around.
5. File electronically
Not only can filing your taxes electronically save you time, but it can also reduce your chances of making an error and getting flagged for an audit as a result. The IRS reports that the error rate for a paper return is 21%, whereas only 0.5% of electronically filed tax returns contain errors. File electronically, and you're less likely to get audited as a result of simple math mistakes.
Although an IRS audit doesn't usually spell catastrophe, if you'd like to avoid finding yourself back on that list, the best thing you can do is try to pinpoint the reason your return was flagged and take steps to avoid it going forward. But don't let paranoia get the best of you. If you've played by the IRS' rules, then you'll probably just have to mail in some more documentation and call it a day.
