Audit is one of the scariest words in the English language for many American taxpayers. While it's true that a tax audit can be a serious inconvenience, the fact of the matter is that the overall chance of being audited is slim: About 1% of all tax returns are selected for a closer look. The even better news is that you may be able to further reduce your risk for an audit with these seven suggestions.
1. Report all of your income. First and foremost, failing to report income from a W-2 or 1099 is an easy way to get audited. Sure, it's tough to "forget" to report W-2 income from your primary job, but if you did some consulting work on the side or had a part-time job earlier in the year, it could slip your mind. Double-check to make sure that income is accounted for. The IRS receives copies of all W-2s and 1099s that are given to you, and if the numbers don't match up, you're asking for trouble.
2. Over-document your tax breaks. If you have any tax deductions or credits that could be considered unusual, be sure to thoroughly document every penny you claim. For example, the average charitable deduction[2] for someone who earns an adjusted gross income of $80,000 per year is 3% of AGI, or $2,400. If you were particularly generous last year and donated say, $10,000, you're certainly entitled to deduct the full amount, but know that large deductions like these catch the IRS's attention. A good idea could be to collect all of your documentation, even if it's not required. For example, if you d onate property worth less than $250, you aren't required to have a written acknowledgement and description of the property from the organization, but in this case, it can't hurt to over-prepare.
3. Be careful when claiming business use of a vehicle. If you are self-employed or own a business, you are allowed to take a deduction for the business use of your vehicle. While there is nothing wrong with this, claiming that you use your vehicle for business 100% of the time is sure to raise some eyebrows. Unless you actually own a separate car that you useexclusively for meetings, entertaining clients, and other business activities, it is extremely rare that 100% of a vehicle's use is business related. In any case, be sure to keep a long of your mileage if you plan on taking a significant deduction for your vehicle.
4. Try to avoid filing an amended return. If you forget to claim a deduction or credit, or need to make any other corrections after you file your return; you have the option of filing an amended tax return. Try to avoid this situation if possible. It's true that the act of filing an amended return doesn't raise any specific red flags, but if your return didn't get audited the first time, why would you want to give the IRS a second chance?
5. Check your numbers -- and then check them again. Mathematical or typographical errors are a major red flag. For example, if you miss a digit when typing in income from a 1099, such as $1,000 instead of $10,000, it creates the appearance that you could be trying to under-report your income. If you use a software program such as TurboTax to file, it generally does the mathematics for you, but typos like this are still possible.
6. File electronically. Granted, it is 2016 and most taxpayers now file their returns electronically. However, there are still a significant number of people who use paper forms-- particularly older taxpayers and those with simple (1040EZ) returns. The problem with using paper forms is that it's much easier to make an error that will catch the eye of the IRS. In fact, data shows that 21% of paper returns contained errors. For electronic returns, the error rate plunges to just 0.5%. As I've said, anything you can do to draw less attention to your tax return, like avoiding careless errors, makes it less likely you'll be audited.
7. Be honest. This should be obvious, but the best way to avoid an audit is to be 100% honest when filling out your tax return. If you exaggerate your deductions, misstate numbers, or worse, simply guess how much of a deduction you're entitled to, it's likely to come back to bite you.
If you've done your homework, you don't need to fear an audit
No matter how much you try, it's impossible to be 100% certain you won't be audited. Plus, there are certain legitimate deductions you can claim that increase your likelihood of an audit. However, if you follow these suggestions -- especially the one about over-documenting everything -- you shouldn't fear an audit.
In fact, many tax audits are simple requests for documentation that can be easily handled by mail. And, even if the IRS decides to single you out for one of their dreaded field audits, you have nothing to worry about if the information you submitted on your return is accurate.
Read the original article[4] on The Motley Fool[5]. Copyright 2016. Follow The Motley Fool on Twitter[6].
References
- ^ YouTube (www.youtube.com)
- ^ charitable deduction (www.fool.com)
- ^ Flickr / Amit Gupta (www.flickr.com)
- ^ original article (www.fool.com)
- ^ The Motley Fool (www.fool.com)
- ^ Twitter (twitter.com)
- ^ There's trouble brewing for America's most hated companies (www.fool.com)
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