Understanding the Risk
While the chances of facing an IRS audit are relatively low, there are certain factors that can increase your risk, such as:
- Reporting a net business loss
- Claiming excessive deductions
- Making careless mistakes on your tax return
- Filing late or not filing at all
Minimizing Your Risk
To minimize your chances of being audited, follow these best practices:
1. Report Accurate Income and Expenses
Avoid reporting net business losses, especially small ones. The IRS may view this as an indicator of underreported income. Additionally, be cautious about claiming excessive deductions, as this can also trigger an audit.
2. Itemize Tax Deductions
Provide detailed information about your business expenses. Itemizing deductions shows transparency and prevents the IRS from questioning your expenses.
3. Provide Detailed Explanations
If you have any unusual expenses or changes in your financial situation, provide detailed explanations to the IRS. This will help them understand your circumstances and reduce the likelihood of an audit.
4. File on Time
File your tax return on time, both electronically or by mail. Filing late can raise red flags and increase your chances of being audited.
5. Avoid Amending Returns
Amending tax returns can increase your chances of an audit, especially if you make substantial changes without sufficient justification.
6. Check Your Math
Ensure that all calculations on your tax return are accurate. Math errors can trigger an audit.
7. Avoid Round Numbers
Use exact numbers when possible, as round numbers can appear suspicious.
8. Don’t Make Excessive Deductions
Be honest about your deductions and avoid claiming excessive amounts. This includes charitable donations, home office deductions, and travel expenses.
9. Use Schedule C for Business Income and Losses
If you own a small business, use Schedule C to report your profits or losses. This is the preferred method for avoiding audits.
10. Complete Your Return Thoroughly
Fill out your tax return carefully and don’t leave any questions blank. Even unintentional oversights can lead to an audit.
11. Sign Your Return
Always sign your tax return before submitting it. Failing to do so can raise suspicions and increase your risk of being audited.
What to Do if You’re Audited
If you receive an audit notice from the IRS, don’t panic. Here are some steps to follow:
- Be Honest: Cooperate with the auditor and provide all requested documentation.
- Gather Documentation: Organize all relevant documents to support your deductions and expenses.
- Respond Promptly: Respond to the IRS within the specified timeframe.
- Seek Help if Needed: If you’re unfamiliar with the audit process, consider seeking professional help from a tax attorney or accountant.
While it’s not always possible to avoid an audit, following these best practices can significantly reduce your risk. By being transparent, accurate, and organized, you can minimize the chances of being selected for an IRS audit.
How to Avoid an IRS Tax Audit (DONT DO THIS)
FAQ
Can you refuse a tax audit?
Can you avoid getting audited?
What triggers IRS tax audit?
What are the odds of getting tax audited?
How can taxpayers avoid a tax audit?
There are a variety of ways taxpayers can avoid the likelihood of an audit. “Most of them come down to filing an accurate return,” says H&R Block’s Benson. For example, math errors, reporting incorrect amounts of income and deductions, and incorrect business return items can be red flags.
Does the IRS audit you?
As of 2019, the agency was auditing only 0.4% of all taxpayer returns, down from more than 2% in the 1970s. Still, it’s important to understand what can raise red flags with the IRS, as well as how to be prepared in case the tax agency does audit you.
Should you be shocked if the IRS audits your tax return?
But if you’re extremely successful (or lucky) and earn a boatload of money, don’t be too shocked if the IRS decides to audit your return. 2. Failing to report taxable income You’re practically inviting a response from the IRS if you don’t report all of your taxable income on your tax return.
How risky is an IRS audit?
There’s no way to eliminate the risk of an audit, but being aware of potential red flags can greatly reduce your chance of being audited. For most Americans, the audit rate is lower than 1%. As of 2019, people or businesses with income over $10 million have an audit rate of 2%. How Does an IRS Audit Work?