How to Avoid a Tax Audit
While the odds of being audited by the IRS are relatively low for most taxpayers, the prospect of having your finances scrutinized by the tax authorities is stressful for anyone. Tax audits can result in penalties, back taxes owed, and a tremendous hassle. However, there are steps you can take to reduce your risk of an unwanted audit.
How to avoid a tax audit
Triple-check your math
The most important factor is being honest and accurate on your tax return. Many audits are triggered by discrepancies, improper deductions, or income underreporting that raises red flags. Sloppy mistakes like simple math errors or failing to sign the return can also increase your chances of hearing from the IRS.
The key is to not give the IRS any reason to take a closer look at your return. Make sure you report all sources of income accurately, don't overstate or claim deductions you're not eligible for, and double-check your math.
Be modest, not aggressive
While you're entitled to claim all legitimate deductions and credits, it's wise to be modest rather than aggressive. Audits frequently happen when taxpayers push the envelope too far with dubious claims that seem out of proportion to their income level. The IRS has algorithms that identify statistical outliers that may warrant examination.
There's no need to leave money on the table when filing, but making extravagant claims beyond what is reasonable can really increase your audit exposure.
Other risk factors
Other audit risk factors include operating a cash-intensive business, taking the home office deduction, and making large charitable deductions. Taxpayers who earn over $1 million also face higher audit rates. However, none of these necessarily mean you'll be audited if your return is filled out properly.
In the end, avoiding an audit largely comes down to being diligent, honest, and modest on your taxes. While no one wants to overpay, trying to aggressively exploit gray areas or omit income is likely to cost you more in the long run if your return gets examined. Taking care to file accurately and keeping thorough documentation can go a long way toward avoiding IRS scrutiny.