How to Avoid a Tax Audit

While there's no guaranteed way to avoid an audit, fear not, less than 1 percent of those who make less than $200,000 are actually audited.c 

In addition to sending complete forms that report all income and having backups for all deductions, there are a few red flag the IRS pays careful attention to. And just because a certain deduction might garner more IRS attention, doesn’t mean it’s wrong or you shouldn’t take it. 

Here’s a list of items potential red flags

1. Cash Businesses: The IRS knows that many workers in cash-based jobs (like a bartender, server or hair stylist) don’t declare their full income. So if you’re business is based on tips, be sure to declare those wages.

2. Suspicious numbers: Large fluctuations in income, too many round numbers (it’s unlikely your mortgage interest was exactly $5,000), large deductions or ample charity contributions, especially compared to those in your same tax bracket, might prompt the IRS to take a closer look. Here’s a tip: When donating, be sure to keep a canceled check or letter from the charity that documents any single donation of $250 or more.c 

3. Medical and Casualty Deductions: Tax law mandates that certain deductions must exceed a minimum percentage of your income before you can claim them, so only a small number of people actually qualify. If you claim these types of deductions, keep records that support your claims.

4. Home Office Deductions: To qualify as a deduction, your home office must be used solely as your principal place of business or to meet with clients and customers – just because you own a desk, doesn’t mean you have a home office. 

5. Mileage Deductions: While you can’t deduct personal or commuting miles, you can deduct certain mileage related to your business. Be sure to keep records of where you drove, how far it was, who you met with and how it related to your business. Here’s a tip: keep a journal in your car to write down this information.

6. Clothing Deductions: Work uniforms that aren’t suitable for street wear can be deducted. For example, a nurse can write off his scrubs, but not a suit, even thought it may have been purchased for business purposes.

A Few More Filing Tips

Even though you can't completely avoid the chances of an audit, you can ensure that any interactions you have with the IRS are relatively stress-free:

  1. Do not rush: Take your time filling out your tax return, get professional help if needed and check your return for accuracy.
  2. Be honest: Report all of your income -- do not take questionable deductions.
  3. Keep good records: The burden of proof of an audit is on you so keep clear, accurate records, as well as receipts for every deduction you claim. The statute of limitations for assessing additional taxes typically runs three years from the date you file your return so keep your records.
  4. Ask for help: If you are itemizing, are self-employed or have difficulty understanding the tax regulations, get help from a professional when preparing your taxes.c 

References

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