5 Ways to avoid Audit

While audits are rare, most Americans would probably like to avoid them altogether. The percentage of people who actually are audited is extremely small, according to the Internal Revenue Service, but the number has risen slowly since 2008. If the IRS does decide to audit you, there is little you may do to stop it. You may, however, reduce the odds that you will be singled out for that extra attention in the first place.

1. Check your figures

One of the most common red flags for auditors – erroneous data entry – is also one of the most preventable. It seems simple enough to follow the advice to “double-check your return,” but surprisingly, people often are too careless regarding their taxes. Correctly reporting dependents and exemptions, as well as ensuring that the numbers match, is important because the IRS's automated system will easily detect discrepancies. And they don’t know if that is a mistake or purposeful.

2. Honesty is the best policy

Perhaps it’s common sense, but being 100 percent truthful on your tax return is an absolute must to reduce the chances of an audit. Realistically reporting income, deductions, credits and other figures can help keep the tax man at bay. Not reporting all your income is a surefire way to attract attention.

3. Go vanilla

The largest pool of filers – which consists of individuals or joint filers who earned less than $200,000 but more than the lowest earners – tends to avoid overt scrutiny. Taxpayers who make more than $1 million a year and those in very low income brackets are most likely to be audited.

4. Realistic deductions

Unusual or unrealistic itemized deductions, either for individuals or small business owners, may raise a red flag for auditors.

For a sole proprietor who files Schedule C, which details profits and business expenses, reporting losses for three years or more could encourage an auditor to request proof that the filer is actually in business.

5. E-filing helps

The Internal Revenue Service maintains that filing returns electronically can “dramatically reduce errors,” lowering the odds of an audit. The error rate for a paper return, the IRS reported, is 21 percent. The rate for returns filed electronically is 0.5 percent.

Courtesy of TurboTax

For more information contact Neikirk, Mahoney and Smith at 502-896-2999