How to Avoid a Tax Audit

  • Disclaimer: The content of this page is intended for general informational purposes only and is not a substitute for professional financial advice.

Guide Note: There's no reason to fear an IRS audit, but there's also no reason to invite one through careless record-keeping or "creative" accounting.

How to Avoid a Tax Audit will review those businesses and deductions that are considered red flags to the IRS and will let you in on a few best practices for preparing your return.

Disclaimer: The content of this page is intended for general informational purposes only and is not a substitute for professional financial advice.

Contact the IRS or a professional financial advisor for the most up-to-date and complete information regarding state and federal tax law.

Introduction

  • While there's no 100% guaranteed way to avoid being audited by the IRS as a certain number of people are chosen every year at random for an audit, you can certainly avoid waving a red flag and screaming, "Audit me, please. I love having my financial records scrutinized by the government."
  • Even if you are chosen for an audit, you shouldn't panic. As long as you're honest, your records are in order and you seek help when you need it, an audit is nothing to fear unless you're Al Capone.

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How to Decrease Your Chances of Being Audited

The requirements to claim a home office deduction are strict. (Creative Commons photo by Fernanda Mancini)
The requirements to claim a home office deduction are strict. (Creative Commons photo by Fernanda Mancini)
  1. Cash Businesses: The IRS knows that many people in "cash businesses" don't declare their full income. So, if you're a bartender, waiter or hairdresser, you should report all of your earnings. Your occupation is a red flag to the IRS. [1]
  2. Doctors, Lawyers and Accountants: These types of professionals typically run their own businesses and do their own bookkeeping. The IRS may want to see documentation of all deductions and expenses. [2]
  3. Large Deductions: The IRS will carefully examine the returns of people taking unusually large deductions or who are involved in questionable investments. [3]
  1. Medical and Casualty Deductions: Because tax law mandates that certain deductions must exceed a minimum percentage of your income before you can claim them, only a small number of people actually qualify for them. If you claim these types of deductions, keep careful records backing them up. [4]
  2. Charitable Contributions: If you deduct more than the statistical norm for this type of deduction, you may be audited. Be sure that you keep a a canceled check or letter from the charity on file documenting any single donation of $250 or more. [5]
  3. Home Office Deductions: Keep incredibly accurate records of any home office deductions you claim. Just because you check your work email from home does not make it a home office. [6]
    • To qualify as a deduction, your home office must be your principal place of business or used to meet with clients and customers in the normal course of your business. [7]
  • There's no way to absolutely ensure that you won't be audited as some filers are chosen at random for the honor. However, you can ensure that any interactions you have with the IRS are above board and stress-free:
  1. Don't Rush: Take your time filling out your tax return, get professional help and check your return for accuracy.
  2. Be Honest: Report all of your income. Don't take questionable deductions.
  3. Keep Good Records: The burden of proof in an audit is on you. Keep immaculate records. You should have a receipt for every deduction you claim.
  4. Ask for Help: If you are itemizing, are self-employed or just don't have a head for numbers, get help from a professional when preparing your taxes. Enrolled agents can represent you in an audit, and online services like TurboTax offer audit-related services.

Resources for How to Decrease Your Chances of Being Audited

Tax Filing Books, Products, and Services




Have any great tips on How to Do Your Taxes? Post your thoughts to the discussion board or email them to Julia: Julia at mahalo dot com.




Have any great tips on How to Decrease Your Chances of Being Audited? Post your thoughts to the discussion board or email them to Julia: Julia at mahalo dot com.