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9 Ways to Avoid an IRS Audit

By DeVry University

In the depths of the U.S. Government, a team of accountants in the IRS is responsible for auditing 1.1 percent of individual tax returns (for fiscal 2011).1  So while the odds of getting audited are reasonably stable, one thing that is growing is employment for accountants and auditors: The sector is expected to grow 16 percent between 2010 and 2020, according to the U.S. Bureau of Labor Statistics.2

That said, you still don’t want to find yourself on the end of an IRS audit by this group of professionals. Here are nine steps you can take to reduce (but not eliminate) the chances that the agency will flag your return.

1. Do the Math—Correctly. Filling out tax returns can be painful, but don’t rush the process. Even an innocent math mistake in, say, adding up your adjusted gross income could get your return flagged. Make sure to double-check every line of your return—including the spaces for basic facts like your Social Security number—before filing.3

2. File on Time. Each year, your tax return, and any payments, must be submitted by April 15. Even if you have to file an extension, you still need to pay whatever you owe by that date. If you’re not sure how much you owe, it’s helpful to pay even a small amount as a good-faith gesture.4

3. Declare Every Last Cent. Make sure you get 1099s and W-2s for every single bit of work you did—whether it be a freelance gig or a temp job—during the tax year. The IRS gets duplicates of all your 1099s and W-2s, so if you don’t declare parts of your income, they’ll notice. If you’re missing any of these forms, contact the issuer and get them. Check out the IRS’s rundown of the various types of income here.5

4. Ask Yourself: Is Your Home Office Really a Home Office? If you work from home, you may be able to deduct a percentage of your rent, utilities, etc. dedicated to your home office. But be careful: The IRS is known to scrutinize such claims. You have to use your home office exclusively (and regularly) as your primary place of business. That means you can’t take home-office deductions if the space doubles as, say, the kids’ playroom. Similarly, don’t claim 100-percent business use of a vehicle—unless you can prove it with detailed documentation.6

5. Be Honest About Business Entertainment Claims. If you’re self-employed, you can get major deductions on business meals, travel and entertainment. But the IRS knows that self-employed filers sometimes get creative with claims on Schedule C, so the agency pays special attention to that form. Keep detailed records and receipts of all your business-related meals and entertainment costs and don’t try to write off that Swiss ski vacation. Also, the IRS is on the lookout for losses written off for activities—such as hotrod racing—that seem more like personal hobbies than businesses.7

6. Be Careful With Noncash Charitable Donations. Keep your valuations of noncash charitable donations modest—were those bags of clothes you dropped off at Goodwill really worth that much?—to avoid raising flags. Save supporting documents and make sure to carefully fill out Form 8283 for noncash donations over $500.8

7. Choose Your Preparer Wisely. If you’re picking a professional tax preparer, make an informed decision—ultimately, you’re the one who’s legally responsible for the accuracy of everything on your return, not your accountant. The IRS suggests a number of steps you can take in picking a preparer, including making sure he or she has a valid Preparer Tax Identification Number (PTIN) and checking with the Better Business Bureau to see if there are any complaints against him or her.9

8. Explain Yourself. If you’re making a claim that could raise eyebrows, it helps to offer a written explanation. File a paper tax return and include a statement or attachments explaining any claims that might appear suspicious.10

9. If You Do Get Audited… Stay calm and seek the professional services of a tax accountant. “Your accountant will want to review your tax return and all supporting documentation,” says Sarah Engle, visiting professor of accountancy at DeVry University and owner and principal tax preparer at Black River Tax Prep near Portland, Ore. “You will need to have this available so that your accountant can discuss with you, or help you determine, the reason you were selected for audit.” Engle also recommends that you familiarize yourself with the IRS’s Publication 1, Your Rights as a Taxpayer, available on the agency’s website.

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1 http://www.irs.gov/pub/irs-soi/11databk.pdf Internal Revenue Service Data Book, p. 21, 2011
2http://www.bls.gov/ooh/Business-and-Financial/Accountants-and-auditors.htm#tab-1
Bureau of Labor Statistics Occupational Outlook Handbook, Accountants and Auditors entry, Aug. 31, 2012
3http://www.usatoday.com/story/money/personalfinance/2013/02/05/tax-tips-avoid-irs-audit/1893313/ USA Today: “Tax tips: How to Avoid an IRS audit,” Feb. 5, 2013
4http://money.usnews.com/money/personal-finance/articles/2012/01/25/how-to-avoid-an-irs-audit U.S. News & World Report: “How to Avoid an IRS Audit,” Jan. 25, 2012
5http://www.usatoday.com/story/money/personalfinance/2013/02/05/tax-tips-avoid-irs-audit/1893313/ USA Today: “Tax tips: How to avoid an IRS audit,” Feb. 5, 2013
6http://www.kiplinger.com/article/taxes/T054-C000-S001-irs-audit-red-flags-the-dirty-dozen.html Kiplinger, “IRS Audit Red Flags: The Dirty Dozen,” March 2013
7Ibid.
8http://www.forbes.com/sites/robertwood/2011/04/05/avoid-irs-audit-triggers/ Forbes: “Avoid IRS Audit Triggers,” April 5, 2011
9http://www.irs.gov/uac/Points-to-Keep-in-Mind-When-Choosing-A-Tax-Preparer IRS.gov: “Points to Keep in Mind When Choosing a Tax Preparer,” Nov. 2, 2012
10http://www.naea.org/newsroom/press-releases/six-tips-avoid-irs-audit National Association of Enrolled Agents: “Six Tips to Avoid an IRS Audit,” Feb. 12, 2013