An IRS audit means time, money and a lot of stress.
There are few words in the English language more likely to produce an involuntary wince than “audit.” That’s because having the IRS into every little detail of your tax return can mean having to search for buried documentation, potentially pay additional taxes or worse.
However, the good news is the ins and out of how to avoid a tax audit aren’t actually as grim as you might fear. Audits are extremely rare, and even rarer if you’re aware of IRS audit triggers so you can steer clear of potential red flags that could result in closer scrutiny from the tax collector.
So, here’s a closer look at the actions that put you at risk of an IRS audit so you can stop it before it starts.
1. Enter Your Information Correctly
Although it sounds obvious, make sure you do the simple things correctly. Making a mistake when you enter your Social Security number or misspelling your name can result in the IRS rejecting your return or worse, having to learn the answer to the question, “What is auditing?” the hard way. If you make this kind of mistake you’ll have to refile, which will delay how quickly you receive a refund.
2. Provide Accurate Numbers
The income amounts you enter on your return must match the information the IRS receives through W-2 and 1099 forms. If they don’t, you’re asking for trouble.
“The IRS computers cross-check the information reported to them on your tax return with the information that is received from businesses filing informational returns,” said Crystal Stranger, an El Paso, Texas-based enrolled agent, National Tax Practice Institute fellow and president of the firm 1st Tax. “If this information is not a match, you are nearly guaranteed to receive a computer-generated audit letter.”
3. Report All Income
You need to report the earnings on your tax return if you make any money outside of your regular job, said David M. Hryck, a partner with the law firm Reed Smith. “If the person or company that is paying you reports the business, you would definitely be raising a red flag,” he said. For example, if you do freelance photography for a company that reports your payment as a business expense, the IRS expects to see the same amount listed as income on your return.
4. Avoid Claiming Too Many Deductions
The IRS selects some returns for audit based on how different your return is from the statistical norms for similar tax returns. If you are entitled to a deduction, you should claim it. But be prepared to back it up if the IRS inquiries.
5. Minimize Year-to-Year Differences
The IRS identifies returns to audit based on comparisons with your tax returns from previous years. “If there is a large differential of an amount from one year to another, it would increase your chances of being examined,” said Craig Smalley, an enrolled agent and founder and CEO of CWSEAPA, an accounting and financial services firm with offices in Delaware, Florida and Nevada. For example, your risk of an IRS audit might rise if you claim $2,000 of mortgage interest one year and $25,000 the next.