How to Avoid a Tax Audit
While the chances of an IRS audit are relatively slim for most taxpayers, the prospect of your finances being audited by tax authorities is stressful for anyone. Tax audits can lead to fines, back taxes and a lot of hassle. However, there are steps you can take to reduce the risk of an unwanted audit.
How to avoid a tax audit
Triple check your math
The most important factor is to fill out your tax return honestly and accurately. Many audits are caused by discrepancies, incorrect deductions or underreporting of income, which raise red flags. Careless mistakes, such as simple math errors or failure to sign a tax return, can also increase your chances of receiving a response from the IRS.
The main thing is not to give the IRS a reason to take a closer look at your return. Make sure you accurately report all sources of income, don’t overstate or claim deductions you’re not entitled to, and double-check your math.
Be humble, not aggressive
While you are eligible to claim all legal deductions and credits, it is wiser to be frugal rather than aggressive. Audits often occur when taxpayers go too far, making dubious claims that seem disproportionate to their income level. The IRS has algorithms that identify statistical outliers that may require auditing.
There’s no need to leave money on the table when filing your return, but making extravagant demands beyond what’s reasonable can really increase your exposure to an audit.
Other risk factors
Other audit risk factors include operating a cash-intensive business, home office deductions, and large contributions to charity. Taxpayers earning more than $1 million also face higher audit rates. However, none of this necessarily means that you will be audited if your return is completed correctly.
At the end of the day, a lot of avoiding audit comes down to being diligent, honest, and frugal in your taxes. While no one wants to overpay, trying to aggressively exploit gray areas or overlook income will likely cost you more in the long run if your income is audited. Taking care to accurately file and maintain thorough records can go a long way toward avoiding an IRS audit.