As much as most of us don't appreciate the hassle of filing our tax returns, the stress of tax prep is nothing compared to that of getting flagged for an audit. Thankfully, there are several small, easy steps you can take to lower your chances of being audited. Here are a few to start with.
1. Keep track of your side income
It's not just your salary you're required to pay taxes on. The Internal Revenue Service wants a piece of every dollar you bring in, whether it's a dividend payment or a little extra cash you earned at your freelance gig. One of the best ways to avoid a tax audit is to report all of your income, but to do so accurately, you'll need a detailed earnings record. And you can't always count on those 1099s to piece together your additional income for the year -- while those forms are supposed to come in the mail, they don't always show up on time or as expected. If you haven't been recording your side income to date, stop what you're doing, create a spreadsheet, and start filling it in. The sooner you start tracking your income, the less likely you are to make a mistake come tax season.
2. Update your mileage log
If you use your vehicle for business purposes, you may be eligible to deduct driving expenses from your taxes. Now this deduction doesn't apply to your typical commute, but if you're self-employed and use your vehicle to do research or visit clients, you can capitalize on this tax break provided you keep extremely accurate records. If you're planning to take a mileage deduction this year but are behind on updating your mileage log, take some time to fill in those blanks before you lose track of your business-related travel. Be sure to include key information such as the date of each trip you took, your starting point and destination, and the purpose of your various outings.
3. Scan and file your receipts
Whether you're planning to write off certain business expenses or medical expenses on your taxes (which you can do if your out-of-pocket medical costs equal more than 10% of your adjusted gross income), it's important that you retain proof of the money you spent. The problem with paper receipts is that they're easy to lose, and even if you're good about filing them, you may come to find that some receipts degrade and become difficult to read over time. That's why scanning your receipts and filing them electronically is a much better idea. You won't run the risk of losing them, and as long as you scan them while they're still legible, they'll serve as a legitimate point of documentation when you go to claim your deductions. Just as importantly, having your receipts on hand will help ensure that the amount you claim on your taxes is as precise as possible, which is a good way to avoid an audit.
4. Hold off on donating money
It's great to be charitable, but if you've already donated quite a bit of money this year, you may want to hold off until the following year to make another sizable contribution. Claiming too large a deduction for charitable donations is a major IRS red flag, so aim to keep your contributions in line with those of similar earners. For instance, the average person earning $100,000 a year donates the equivalent of 3% of his or her adjusted gross income -- roughly $3,000. If you earn $100,000 a year but give away 10% of your income, or $10,000 to charity, you may be doing so out of the goodness of your heart, but if you claim that deduction on your taxes, the IRS might look to investigate.
The good news about tax audits is that your chances of being flagged for further IRS scrutiny are actually pretty low. Less than 1% of U.S. tax returns get audited every year, and of those, more than 75% are settled by mail as opposed to in person. So if you do get picked for an audit despite your best efforts to avoid one, don't panic. As long as your return is truthful and accurate, you really have nothing to worry about.