When tax season comes along in the US, taxpayers can go into panic mode wondering how they are going to survive tax season. One of the main reasons these feelings arise is because taxpayers are worried that they will be audited. Therefore, today I will be discussing how to lower your risk of being audited in the US. However, keep in mind there are no tips that can guarantee you 100% that an audit will not take place. The tips I will provide today are just ways for you to reduce your chances of being audited.
Step 1: Double Check All of Your Calculations
The number one reason American taxpayers are audited is because they have erroneous data entries. However, the good news is this can be prevented if you just double or maybe even triple check, all of your calculations. This may seem as though it is common sense yet you will be surprised at the number of people who do not recheck their returns before they submit them to the IRS.
Additionally, before submitting your tax return you want to make sure that all of your financial paperwork has arrived. This way you do not have to worry about making inaccurate estimations that can set off red flags with tax auditors. Many tax returns mistakes can be avoided but only if you check your return before you submit it to the IRS.
Key things to look for include:
- Accurately reporting dependents and exemptions
- Making sure numbers match
The IRS’s system can easily find discrepancies and you will be audited for something that you could have double-checked and corrected before submitting your return.
Step 2: Always Be Honest
If you want to reduce your chances of being audited you want to make sure that you are 100% honest when it comes to your tax return. You have to be honest when reporting income, deductions, credits, and any other figures. If you do not report all of your income that is one, sure fire way to get yourself an audit. The IRS considers that an outright lie, especially when you are trying to hide a six figure income or any other large sums of cash. If you are self-employed, you have to make sure you save your receipts for all of your deductions because the IRS will want verification for multiple deductions that you claim to have made purchases for.
Step 3: Provide Verifications Up Front
The people who are most commonly audited are those who have made more than $1 million or are in very low-income brackets. This is because wealthy people tend to take more deductions for charitable donations and those in very low-income brackets are notorious for committing tax fraud. However, the good news is if you file Form 1040-EZ, do not have children, pay rent, and only make a modest income your chances of being audited become lower. Therefore, if you were someone who has many deductions, I would recommend sending them verifications up front so if a red flag does pop up they have the verification that they need from the beginning to see that you are telling the truth.
Step 4: Use Realistic Deductions
If you use unusual deductions, you will increase your chance of being audited as it raises red flags. For example, when sole proprietors file Schedule C and report losses for three years it raises a red flag. However, if you have verification attached you will be okay yet in the event that you do not, you are more likely to be audited. Furthermore, when using deductions you want to make sure that your deductions are legitimate. For example, you cannot claim commuting expenses to your regular job yet a special trip to a new client would be an eligible deduction.
Many American taxpayers are confused about deductions. Therefore, I recommend having a professional file your taxes or using credible software, such as Turbo Tax, so you can make sure, you are only claiming legitimate deductions.
E-File When Possible
The IRS has stated that e filing drastically reduces your chances of making errors, which in return reduces your chances of being audited. As I discussed earlier, mistakes are the number one reason for audits. Therefore, if you e-file you are lowering your risk. Think about it, the error rate for paper returns is 21% and the rate for e-filed returns is 0.5%.
It is not uncommon to be afraid of being audited when filing your taxes in the US. However, usually when people are audited they just receive notices from the IRS asking for more information or clarification. As long as you follow the tips I have provided today you will have lowered your risk of an audit and it should not be anything to be concerned about. In 2011, 141 million individual returns were filed and only 1.1% were audited.