Please ensure Javascript is enabled for purposes of website accessibility

Do These 3 Things to Reduce Your Risk of a Tax Audit

By Kailey Hagen - Mar 11, 2020 at 8:32AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Get your taxes right the first time by following these steps.

You know what's worse than doing your taxes? Having to do them again. But that's the reality for about 1 million unlucky people every year. The government audited 0.5% of all tax returns from the 2017 tax year, the latest year for which IRS data is available. An audit is where the government pays a special visit and goes through all of your tax documentation with you to make sure you paid your bill correctly.

Though about 30,000 of the 1 million audits resulted in the individuals getting extra refunds, many others weren't so lucky. If you don't want to take that risk, it's important to do your taxes correctly the first time. Here are a few things to keep in mind.

Man filling out tax form

Image source: Getty Images.

1. Take your time

The most important thing you can do is to go through your tax return carefully. Rushing increases the risk of making an error, like transposing a number or accidentally skipping an important step. Even if it was purely accidental, the government may decide to investigate if it seems like you're trying to hide income from it.

Once you're finished with your tax return, you should go over it all again one last time. If you're having a professional do your taxes, you should still look over everything before you submit it. It never hurts to have an extra pair of eyes on something that important.

2. Be honest

It's difficult to hide income from the government because the companies that paid you are submitting their own taxes and they report the income they paid to you throughout the year. So if you don't also report that income, it raises red flags. 

Some people think they can trick the system by claiming tax deductions or credits that they don't actually qualify for, but this can also come back to bite you. If you're audited, you must provide the government with documents to prove your deductions were legitimate or else it will disallow them and you'll get a bigger tax bill. 

Always hold on to all of your receipts and other paperwork that prove your tax deductions for the year and keep them with your tax return in case you need them in the future. You should also verify that you qualify for a tax deduction before you claim it. Qualification requirements can change from year to year, and that may affect your eligibility. For example, you used to be able to write off medical expenses that exceeded 7.5% of your adjusted gross income (AGI), but now you can only write off medical expenses that exceed 10% of your AGI. 

If you're using tax filing software, it should ask you questions to determine your eligibility for tax credits and deductions, but you'll still need your documents on hand to prove how much you spent. You can't just guess and hope for the best.

3. File electronically

Most people prefer to file electronically instead of dealing with paper forms because it's easier, but there's another good reason to go paperless. The average error rate among electronically filed returns is 0.5%, compared with 21% for paper returns. This is largely because when you file electronically, the computer does most of the math for you, reducing the likelihood that you'll make a simple mistake like adding incorrectly.

Many versions of tax filing software will also check over your return before you submit it and alert you to any obvious errors or areas of concern so that you can correct them before you submit it. They may also have tax professionals standing by to answer your questions if you're unsure how to properly fill out a certain section. 

Even if your taxes are flawless, that doesn't mean the government can't audit you. But it probably won't. As long as you follow the three steps listed above, you likely won't have to deal with your taxes again until next year.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.