In the average year, the IRS audits approximately a million and a half American taxpayers. While this may seem like a massive number, the reality is that this represents only about 1% of those who file taxes. However, for those 1% of Americans who are audited, the process can be time consuming and extremely costly.
Fortunately, being audited by the IRS is not something that most Americans will have to deal with, and there are preventative measures that taxpayers can take which will reduce their chances of being audited. Here are 6 concrete steps you can take to help avoid being audited by the IRS:
Report All of your Income
One of the most costly mistakes that you can make on your tax returns is underreporting your income. For example, if your employer reports to the IRS that you earned more income than the figure listed on your returns, that will serve as a major red flag for auditors. Of course you should never misreport your income intentionally—that is a serious crime—but even when it comes to honest mistakes, it’s crucial that you go over your tax returns multiple times to ensure that you’re reporting all of your income.
Be Meticulous with Deductions
While it’s certainly your right to claim all of the deductions that you qualify for, you should not claim excessive deductions that aren’t intended for people in your situation. Claiming an excessive number of deductions can raise suspicions among auditors, and you’re much better off in the long run by limiting your claimed deductions to those which are consistent with your earnings.
Don’t Try to Hide Assets
Perhaps the biggest mistake you can make on your tax returns is purposely trying to hide money from the IRS to lower your tax burden. The government has the means and the ability to find out the truth, and you’ll face criminal penalties for hiding your income.
Use Exact Figures
Don’t use estimates when claiming deductions. Instead, claim the actual expenses because round numbers are a red flag for auditors that are investigating excessive deductions. The IRS wants to ensure that your numbers are accurate, and using round numbers is a sign that you’re not being scrupulous in your data. In a worst case scenario, if you do get audited then it’s imperative that your receipts line up with the numbers on your tax returns.
Be Careful about Home Office Deductions
One of the most risky deductions you can claim on your tax returns is for a home office. Of course, if you do qualify for this deduction, then you have nothing to fear. But you must be aware that you need to meet strict criteria in order to qualify for this deduction, so be sure that your circumstances fit the deduction before claiming it.
Tax Tip: The higher your income, the more likely your tax returns are to be audited. Everyone needs to be meticulous when it comes to reporting their income and deductions accurately, but this is especially true if you are reporting a high income.