Every year around tax time, millions of Americans worry that their tax returns could be selected for an IRS audit. However, an audit doesn't have to be such a scary thought.
All an audit means is that the IRS has chosen to take a closer look at your tax return. Maybe the agency simply wants you to verify a charitable contribution, or maybe it wants to have a look at your business' books to make sure your profit equals the amount claimed on your return. Many times, you simply made a mathematical error on your form that set off a "red flag" in the IRS' system.
While being selected for an audit would certainly be inconvenient, you shouldn't have anything to worry about as long as you follow these three simple guidelines.
The No. 1 rule for avoiding an audit in the first place is to be honest on your tax return. The whole purpose of an audit is to discover and correct inaccurate information on a tax return. As a result, if 100% of the information on your return is truthful and accurate, there should be nothing to catch.
There are exceptions to this, of course, as not all audits are avoidable. While many audits are initiated because something in the return catches the attention of the IRS, some tax returns are chosen at random. But because you can't control this, there's no reason to worry about it. Just be honest on your returns on let the chips fall as they may.
Save your documentation
If all of the information on your tax return is truthful and accurate, that's great. Just make sure you can prove it if asked.
As a general rule of thumb, you should save all records related to your tax returns for at least three years after you file. However, there are some situations in which the IRS recommends keeping your records for longer periods of time (the agency actually recommends keeping your records indefinitely if you decide to file a fraudulent return).
You should keep anything related to your income, investments, and deductions or credits, including (but not limited to):
- 1099 forms
- Any tax paperwork received from your brokerage
- Mortgage statements
- Reciepts for deductible purchases
- Bank and credit card statements, to back up your receipts
- Business-related documentation (mileage logs, travel records, etc.)
- Anything else you used to determine your deductions
If you don't want to keep all of your tax records in a filing cabinet, shoebox, or desk drawer, one method I recommend is to scan everything and save copies of your documentation electronically. It's much easier to categorize and organize information, and you'll be glad you did if you ever need to find something.
Double-check your numbers
One of the biggest red flags on a tax return is an accidental error. When your employer issues you a W-2, or you receive a 1099 or other tax document, a copy is also sent to the IRS. Numbers that don't match up are one the most surefire ways to catch the IRS' attention.
For example, let's say one of your 1099 forms shows income of $1,034.55. By entering the information quickly, you accidentally skip a digit, so you type $134.55 instead. Not only can this type of error trigger an audit, but you could also end up owing more tax as a result.
Aside from avoiding entering the wrong income and deduction numbers, also confirm that your personal information (like your Social Security number) is entered accurately.
Do these things, and you'll be fine
Only 1% of all tax returns are audited, and many of those involve simple verification of certain deductions that can be handled entirely by mail. However, if your return happens to be selected, you definitely want to be prepared.
As long as you are honest when preparing your return and can prove it, and you enter your numbers accurately, you should have absolutely nothing to worry about. For you, being audited should be considered nothing more than a simple inconvenience.
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.