Tax Audits Don’t Have To Be Scary — Follow These 7 Steps To Eliminate Worry and Dread
Don't underestimate the importance of staying organized.
The IRS only audits about 1 percent of individual tax filers each year, which means the odds are good that you won’t be on their list. Even so, many of us live in a state of dread as tax season approaches, worried that we’ll be one of those selected for what we’ve all been trained to believe is a massive inconvenience. As such, it’s worth doing all you can to minimize the chance that the IRS will flag your return. Here are seven things you can do to stay in that audit-free 99 percent.
1. Keep impeccable records.
It’s important to keep track of all income you make, no matter what the source. Make sure to document stock dividends, bank interest, cash payments, gambling winnings, jury duty payments, and unemployment benefits, then report them along with your work income.
Keep all of your receipts, especially if you plan to itemize your deductions. And don’t start doing your taxes until you’ve received all the pertinent documents from your employers: The IRS receives copies of all your 1099s and W-2s, and its computers will check your return against them. If you fail to report income from a contracted job, for example — perhaps you accidentally threw away the envelope that contained a 1099 — the IRS will be privy to the discrepancy, which could be enough to prompt an audit, even a year or two later. Keeping good records is the single most important step you can take to avoid an audit. What’s more, in the unlikely event you do get audited, having accurate records will allow the process to move much more smoothly and efficiently — and knowing you’ve maintained good records may even decrease your stress level in the process.
2. Double-check your figures.
We all make silly mistakes from time to time — just try to avoid making them when you fill out your tax forms. Writing the wrong number or putting it in the wrong box is one of the most easily avoidable mistakes that taxpayers make every year. Others include forgetting to sign your return and leaving off your address or Social Security number. Be sure to fill in all the required boxes, and double-check the figures on all pages of your return — whether you do your taxes by hand or use a software program. Failing to do so could lead to an error that raises the suspicion of the IRS.
3. Be careful about claiming deductions.
Claiming deductions can save you a lot of money, but if done incorrectly — or if your deductions are unusually large — it can serve as the basis for an audit. Before you file your taxes, carefully read the rules for what constitutes a legal deduction. Remember: There is often a fine line between what qualifies and what doesn’t. For example, your daily commute doesn’t qualify, but onetime trips for business purposes often do. If you’re self-employed or own your own business, reporting losses for three consecutive years or more might cause an auditor to investigate the legitimacy of your work.
4. File online.
If you’re someone who prefers to do your taxes by hand, consider that your chances of making a mistake go down dramatically if you file online. According to the IRS, the error rate for paper returns is 21 percent, while for electronic returns it’s 0.5 percent. When you file online, most of the math is done for you automatically.
5. Estimate the value of donations at a fair price.
Many people take advantage of deductions offered by the IRS for charitable giving. If you donate goods rather than money, however, it’s up to you to estimate their value. This can be a tricky exercise. For less-expensive items, Goodwill and the Salvation Army offer online value guides, based on sale prices in their stores, that can help you determine how much to claim. Remember: Items must be in good condition or better in order for you to deduct them. If you’re in doubt about the value of donated goods, consider having a professional appraiser write a letter you can include with your tax return. For items valued at $5,000 or more, an official appraisal is required.
6. Be truthful and realistic.
As a general rule, people who report their income in full will probably not be audited. That includes reporting even small amounts of cash you’ve received for a side job or two. If the person or business you worked for happens to get audited, the IRS will be able to track their payment to you, which could lead to you getting audited, too. When in doubt, err on the side of reporting and documenting too much. Avoid estimating deductions or rounding up to implausibly tidy figures.
7. Be average.
Having a middle-class income puts you in the class of people least likely to get audited. Taxpayers filing individually or jointly who earn less than $200,000 per year but more than the very lowest earners tend to escape the suspicions of the IRS. Higher earners are more likely to take a lot of deductions and contribute more to charities, while lower earners are more likely to file for the Earned Income Tax Credit, all of which can potentially raise red flags for auditors.
A handful of audits each year are random, so there’s still a chance you’ll get audited. Keep good records and be prepared to back up your claims. And be sure to sign your returns, something thousands of people each year forget to do.
A version of this article appeared in our partner magazine, The Essential Tax Guide: 2023 Edition.
