There is no way to completely avoid an audit by the IRS, since many of the files chosen for review are determined completely by random. However, there are some steps you can take to reduce your chance of being selected. Many of the same actions can help you even if you do end up receiving the dreaded notice, because they help you have a better experience and a stronger chance of a successful review.
Messy tax returns may increase your chance of the IRS choosing you to audit, so to reduce your chances, always turn in a neat and tidy return. This is easily done by filling out the form on the computer. However, if you do plan to handwrite it, use a practice form to calculate everything and then rewrite it on a clean form. It is also beneficial to always double check that you have filled everything out correctly before you send it to the IRS.
One way to avoid an audit is to include documents that back up your deductions. Although you do not want to send in every receipt, you should include documentation if you have any odd deductions, such as storm damage or solar energy installation. This reduces the chances of the IRS red flagging your form due to an unusual deduction.
Even if you do not include your evidence with your form, you should take the time during your filing to gather all your documentation and organize it so that you are ready for an audit defense, should you need one.
Rounding the numbers for income, expenses, and deductions may make the math easier, but it increases the chance of an audit. Therefore, take the time to actually calculate the real number based on your receipts. In addition to appearing more realistic than pretty, rounded numbers, it may also help you to reduce your tax liability.
Make Sure that You Report the Right Income
A major red flag for an audit is if you report a different income than your employer does. The IRS checks W2s and 1099 forms, and if there is any difference you are the one they will review, not your employer. To reduce your chances of your income not matching, review your forms and have your employer or other source of income fix it before you file.
Don’t Have a Net Loss on a Small Business
No one wants to have a loss on a small business endeavor, and another reason to avoid this is to reduce your chance of an IRS audit. Although there is not a lot you can do if you really did have a net loss, sometimes you may be able to legally adjust your business expenses so that you do not have a loss. You do not want to make changes that could also red flag your account for tax fraud, so it is best to work with a professional on any changes to ensure you remain compliant with the tax law.
Lifestyle Changes to Avoid Audits
There are a few things you can do to reduce your chance of audits if you have an irrational fear of them, but they may require some lifestyle changes. The most commonly audited group of people is those who are self-employed or independent contractors. Therefore, if you want to avoid an audit, then always choose jobs that pay you as an employee. This also can make it easier to pay your tax bill at tax time, since a percentage has already been taken out throughout the year. Another heavily audited group of individuals are those who make over $100,000 a year. If you want to fly under the radar, then simply remain living a 5-figure lifestyle. The other lifestyle change you can make is to move to an area that has fewer audits than others. Although these can decrease your chance of being flagged for an audit, they also do not guarantee an audit-free life, and may not be in your best interest for other reasons.
People may fear being audited, but it does not have to be a terrible experience. Although you should do what you can to avoid it, as long as you are honest on your taxes and have the documents to back up your deductions, credits, and other items on your tax return, then you have nothing to fear. If you do receive an audit notice and are unsure what to do, the tax professionals at Fidelity Tax Relief can help you set up an audit defense for a better outcome. Call us today at 877-372-2520 to see how we can help you.