Most people dread being flagged for a tax audit. Fortunately the average taxpayer has only a 1 percent chance of being audited.1 But the likelihood of the IRS carefully examining your tax return increases with the money you make. In fact roughly 60 percent of the tax returns flagged for examination in 2012 reported an adjusted gross income above $200,000, according to the IRS.2
Although IRS audits are stressful, fear of a tax audit is not a good reason to avoid reporting income or taking legitimate deductions.
"I would never avoid taking a deduction that you're otherwise entitled to take," says Richard Davis, a professor of accounting at Susquehanna University in Selinsgrove, Pennsylvania, who worked in the office of the chief counsel of the Internal Revenue Service. "If you're organized you've got records and everything is verified, so you have nothing to worry about."
Regardless of how much money you make, here are some simple steps you can take to help
1. Hire a tax preparer or CPA.
"Having a tax professional prepare your return doesn’t guarantee you won't be audited, but it does make your return more credible to the IRS," Davis says. And, if you are audited, your tax pro can help you through the process. (Your preparer's fee may include tax audit protection.)
2. Stay current on tax changes.
If you do your own taxes it’s particularly important to understand how the tax code changes from year to year. For instance the IRS simplified the way the home office deduction is calculated starting in 2013. Look for coverage of important changes in the news from January through mid-April, or check out the consumer-friendly resources at IRS.gov. Using tax-preparation software also can ensure that your tax return reflects the current year's tax code.
3. Include all your income.
Don't forget to report income from investments or a second job. If you’ve received Form 1099 for interest, dividends or gambling winnings, the IRS compares those forms with what you report on your return. "If they don't match, you're going to get a letter from the IRS you don't want," says Davis.
4. List actual amounts.
When you fill out your return you can round all amounts to the nearest dollar. However, rounding to the nearest hundred or thousand dollars is against the law. And depending on the context, nice round numbers could be a red flag. Exception: People tend to make charitable contributions in neat increments of $25, $50 or $100, so a round number donated to your church or alma mater generally won't attract the attention of the IRS.
5. Check your arithmetic.
A few careless addition or subtraction mistakes could bring your return greater scrutiny. Again if you don’t hire a professional, Davis suggests using tax-preparation software to prepare your return or check for errors. "Computers don't lie about math equations," he says.
1,2: "2012 IRS Data Book."
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.