How to avoid an IRS Tax Audit

How to Avoid an IRS Audit

By Mark P Cussen, CFP, CMFC, eHow Expert in Personal Finance

Avoid an IRS Audit Avoid an IRS Audit

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Getting audited can become a taxpayer's worst nightmare. Fortunately, there are many things you can do to reduce your chances of being selected for this process. The IRS randomly selects tax returns by computer according to a secret--and very complex--formula known as the discriminant function. In this article I will show you some things you can do to steer clear of some of the perceived variables that this formula looks for when ferreting out random returns for audit.

Instructions

Things You’ll Need:

  • Proof (receipts) of deducted expenses
Step 1
The first, and most obvious strategy you can employ to avoid an audit is to refrain from taking deductions that you did not incur. The IRS will look suspiciously at substantial deductions on a return that are disproportionate to income. If you made $40,000 last year and list business deductions of $50,000, you had better be prepared to back up your deductions with proof of expenses before an auditor--or at least through the mail.
 
Step 2
Taxpayers who itemize and self-employed taxpayers face a much higher chance of being audited than those who take the standard deduction and earn W-2 income. Carefully document all deductions taken on Schedules A and C and keep copies of all receipts of deductible expenses. If your deductions are substantial (and legitimate), it may be wise to simply include a copy of all receipts with the original return. If the IRS sees these receipts, it may simply accept the deductions with no further questions.
 
Step 3
Of course, if you fear being audited because your tax filing history is sketchy, it may be wise to forego taking deductions that could raise eyebrows at the IRS. You'll have to be the judge of this; a substantial current deduction may be worth the risk of having prior years of tax returns scrutinized. But you need to carefully consider the possible ramifications. Don't forget the time and inconvenience associated with the audit process.
 
Step 4
Going back to Step 1, taxpayers who fail to report all of their income are especially at risk for an audit. Those who fall into this category are often caught, as the payors of many types of unreported income will report who received the income they paid to the IRS. Therefore, think carefully before omitting your taxable income on your 1040.
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