For some taxpayers, the stress of tax season starts whenever those first W-2s appear in mailboxes. For most people though, it isn’t until sometime around the beginning of spring when the anxiety blooms right along with the flowers. Some of this distress arises from an uncertainty as to whether they will be receiving a refund or expected to pay more. However for many taxpayers, the fear of being audited turns the proverbial taxman into a bogeyman worse than most childhood monsters. The good news is there are a few basic suggestions to help avoid a tax audit.
The first consideration when attempting to avoid a tax audit is to be prepared with all of your information before you even start the filing process. Depending on your situation, there are several potential items you will need before you begin, including:
- W-2 forms from any employers for whom you’ve worked over the past year
- 1099 forms for income other wages, salaries and tips (such as unemployment or self-employment)
- Other end-of-year income statements from banks or investment companies
- Mortgage information
- Utility statements (for self-employed)
Failure to include this information, especially if you used any of them the previous year, could set up a red flag and trigger an audit. If you do have significant changes from prior year returns (such as drastic changes in income, deductions or even dependants), make sure you include documentation to support this discrepancy, including additional forms and worksheets wherever available. It’s possible that these changes will still set off the automated system, but if you have provided enough documentation, an actual IRS agent may be able to examine your return and decide that you can avoid a tax audit.
In addition, it’s a good idea to be additionally prepared for an audit if you are employed in a certain capacity. Some positions that deal largely with cash income, such as restaurant and bar employees or beauticians, are frequent targets for audits. Other targets include occupations that normally handle their own bookkeeping, such as lawyers, doctors and accountants. Again, the key is to make sure you have all your documentation in order.
Be Honest and Accurate
American author and humorist Mark Twain once said, “If you tell the truth, you don’t have to remember anything.” While this is obviously not the only thing that matters when it comes to taking the best steps to avoid a tax audit, it is certainly shouldn’t be ignored. Many people are tempted to neglect reporting compensation received “under the table” or portions of their self-employment income, figuring that there is no incriminating paper trail. However, self-employed contractors are already targets for audits, and again, income discrepancies from one year to the next raise flags. Also make sure that you can justify deductions. While receipts are good documentation to prove expenditures, that doesn’t mean said expenditures will be considered acceptable deductions.
Along the lines of deductions, it’s important that you understand accurate deduction amounts and limits if you’re looking to avoid a tax audit. Keep in mind that the price you originally paid for an item will not necessarily be the amount you can write off if you donate that item. Many charitable organizations actually have guides which can tell you how much the IRS will let you deduct for various donations.
Accuracy is also key in filing your tax returns. Double check all of your numbers and calculations (especially if you are paper filing) before officially submitting your return. One of the most common mistakes people make when filling out their returns is an incorrect Social Security number. While this won’t automatically trigger an audit, it could potentially delay any refunds you might have coming to you. However, a simple mistake with the entry of a deduction might put you on the radar.
Know How and When to File
While many people still prefer to file the old fashioned way, using paper forms and pen, the general trend among taxpayers is moving toward filing electronically. A few interesting statistics about this trend:
- The first electronically filed tax return was received by the IRS in January of 1986.
- Only three years later, tax returns were able to be filed by residents in 36 states.
- By 1990, any taxpayer in the country expecting a refund was able to file electronically.
- In 2010, almost 70 percent of individual tax returns were filed electronically.
- According to the IRS, the error rate of electronic filing is only about .5 percent, as opposed to almost 21 percent with paper filing.
In addition to the lower chances of mistakes, personal tax preparation software reduces your chances of being audited. E-filing also ensures that you get a confirmation from the IRS within 24 hours of submitting your return, and as this process saves the IRS agents from having to retype your return at their service center, it also speeds up the time to get your refund.
If the time to get your refund isn’t an issue (or if you aren’t expecting a refund), most experts will say it’s still more beneficial to e-file. However if you want to avoid a tax audit, those same experts will suggest waiting until the last minute, or even filing an extension, as most returns being selected for auditing are chosen early in the season.
Tax preparation can be a nightmare, even if you’re expecting a refund and aren’t necessarily worried about being put under the microscope after all of your time and effort. Unfortunately sometimes it’s not up to you. However these simple suggestions should give you the basic tools you need to do everything in your power to avoid a tax audit. And once you’ve submitted your return, go out and smell those blooming flowers. You’ve earned it.