What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Ways to Avoid an Audit

Original post by Rebecca Lake of Demand Media

Avoiding common mistakes can prevent an IRS audit.

Enduring an Internal Revenue Service audit can be a tremendously stressful and potentially costly experience. If the IRS determines tyour tax return contains erroneous information or incorrect calculations, you may end up owing hundreds or even thousands of dollars in additional taxes and penalties. If you're concerned about triggering a tax audit, learn what you can do to avoid earning a visit from the IRS.

Report All Income

Failing to report all of your income can potentially trigger an audit. When you receive a 1099, W-2 or other income statement, the IRS also receives a copy. When you file your return, the IRS will compare its estimate of your income with what you actually report. This is particularly important if you're self-employed or own a business and you receive cash payments from clients. Even if the discrepancy is not significant, the IRS may view your failure to report all sources of income negatively and choose to complete a full examination of your return.

Don't Overdo Deductions

A deduction reduces your overall taxable income, thereby lowering the amount of taxes you may have to pay. While you should take advantage of every deduction for which you qualify, claiming certain deductions may cause the IRS to raise an eyebrow. For example, if you work from home, you are certainly entitled to claim the home office deduction. However, you must adhere strictly to the IRS guidelines for doing so and avoid claiming expenses not related to the business use of your home. Claiming substantial charitable or business expenses for which you don't have written proof can also potentially lead to an audit.

Pay Attention to Detail

Before you submit your return, go over your information carefully to look for mathematical errors and incomplete or incorrect information. The IRS will be doing the math when it receives your return, and if the numbers don't add up, you could be targeted for an audit. Check to ensure that your personal information, such as your full name, address, Social Security number or tax identification number, is entered correctly. If you're doing your taxes on your own and filing a paper return, this is even more crucial since online filing software typically performs an error check prior to finalizing your return. Finally, don't forget to sign and date your return.

Considerations

While some returns are selected for an audit at random, the probability you may be audited is relatively small. According to the IRS Fiscal Year 2010 Enforcement Results, the audit rate for personal returns was 1.04 percent for individuals earning less than $200,000. The rate for individuals earning more than $200,000 was 3.1 percent. The rate jumped to 8.36 percent for individuals with a reported income of $1 million or more. Keeping good records, reporting all income and claiming only those deductions that you're entitled to can lower your visibility on the IRS audit radar.

                   

References

About the Author

Rebecca Lake is a freelance writer and virtual assistant living in the southeast. She has been writing professionally since 2009 for various websites. Lake received her master's degree in criminal justice from Charleston Southern University.

Photo Credits

  • Comstock/Comstock/Getty Images

Advertisement