Don’t Make the Taxman Mad! 5 Ways to Avoid a Tax Audit
The IRS claims to have examined less than 1% of all tax returns submitted from 2010 to 2018.
Is this something that concerns you when submitting your tax return with such a small number being flagged yearly?
Though worrying about a tax audit every year is unnecessary based on the IRS’s statistics, you should still go the extra mile in preparing your return to avoid the process altogether. Some simple actions help reduce your chances of an audit, and we’re here to share them with you.
Continue reading below for the top 5 ways to prepare your tax return properly to avoid the dreaded audit.
1. Double-Check Your Figures
One of the best ways to avoid an IRS tax audit may be the easiest: double-check the numbers that go onto your return and make sure the math adds up. This should be common practice even if you e-file yourself or work with a CPA. Any small error in math or a decimal point being in the wrong place could mean an audit.
Make sure columns add up and that there’s the documentation for your income sources and deductions before you submit.
2. Make Deductions Honest and Realistic
Home office deductions, medical expenses, and meals and travel are three areas that could prompt a tax audit, possibly in the form of an IRS representative coming to your business to review documents explained as an IRS field audit here.
You should be honest and realistic when including deductions on your tax return. New deductions that you’ve never taken before or deductions that are disproportionate from your income raises the red flag. Work with an accountant for any new deductions to make sure they fit the honest picture of your work.
3. Use Smaller Values on Donated Goods
Many taxpayers overestimate the cost of donated goods as it is up to the taxpayers themselves to determine the value of the items. It’s easy to become attached to goods and view them as more expensive than actuality. However, the IRS sees a fair price as around 20 to 30% of the original price.
Large values on the donated goods section of your income tax report may raise eyebrows and encourage the IRS to audit you.
4. Report All Portions of Income
A double income or even triple income becomes much more common for the modern-day worker. Yet you must report each of these income sources, no matter how small, on your tax return.
Submit a Schedule C for small business earnings. Report the sale of assets such as your home. Document and share your freelance income to report money that you may have overlooked on a PayPal or Venmo receipt.
5. File Properly and On-Time
There are many reasons, apart from chance, that the IRS would select you for an audit. One of the most unbelievable and avoidable is filling out your tax return with every signature, item, and timeline accounted for in the process.
The IRS flags your return if it’s unsigned. Further, returns get marked when questions are left blank. You can fix these small oversights by checking twice before submitting, marking $0 as a line item when needed, and submitting on time.
Simple Steps to Avoid a Tax Audit
The IRS audits a much smaller percentage of individual returns than you may think. But a tax audit takes place when least expected and you never know when you may be signaled out in the process. You reduce this lightning strike chance further by following the 5 actions above.
Double-check your tax return as you do your Christmas list, and read up on other ways to be smart about your finances in other blog posts on the site!