How to Avoid an Audit
62. That’s the number of days you and I have left to file our taxes. The clock is tick, tick, ticking away towards the filing deadline.
I have always felt the need to be extra careful with my taxes. I am a stickler for saving receipts and statements because I’m always worried about being audited. Individuals, who are self-employed, like me, are audited five times more than the average employee, according to IRS data.
That statistic scares me. I’ve never been audited and I sure as heck don’t want to it to happen now.
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I’ve heard all kinds of crazy tactics people try in order to avoid an audit. A relative once assured me he had never been audited because he always waited till the last possible day to file his return. He was sure that the IRS was so overwhelmed by the amount of returns at that point, that his account was consistently overlooked. It was also suggested to me once to underpay my taxes by $5-10. The theory was that my account would go to collections and I may incur a small fine, but that it would insure that I wasn’t audited.
I’m not willing to try to crazy schemes and I don’t want you to either. There is no need. There are some sure-fire ways to help avoid being audited. I’ve compiled a list of the best tactics out there that ensure a smooth tax filing process.
Your first line of defense against the IRS is something you can buy relatively inexpensively at nearly any retailer. Using a calculator can save you from the most common reason people get audited. Simple math errors are sure to get you in hot water with the IRS. Double-check your numbers before you send in your return. If the IRS does contact you about an audit check your numbers against theirs. They may not be able to read your handwriting or they may have inverted a number while inputting your tax return into the computer system. Take comfort in the fact that, for the most part, simple math errors like addition and subtraction mistakes rarely lead to a full audit.
Another easy way to avoid an audit is to watch what you say on social media websites. While you may not think you’re being watched, let me assure you, you are. The IRS has been very successful in catching people who brag about getting one over on them on websites like Facebook and Twitter. The IRS hands out cash rewards to whistle blowers too. If you brag to your friends about paying thousands less in taxes than you should, they can turn you in and earn 15-30% of whatever the IRS collects. That’s a pretty big incentive, especially when they can do it anonymously. Even seemingly innocent pictures posted online can hint to the IRS that you are living a much grander lifestyle than your tax returns reflect. It’s best to keep your creative accounting strategies to yourself.
Unusual deductions are a surefire way to get an audit letter from the IRS. When the IRS sees larger than usual deductions, especially in the cases of home offices, business travel, entertainment and charitable donations, it raises a red flag in the eyes of an IRS agent. Those who are self-employed run a higher risk of being audited because it’s easier for them to convert personal expenses into business expenses. Your best defense is to provide a letter of explanation when claiming a larger than normal deduction or loss. If you’re claiming much higher charitable donations than in past years, explain to the IRS that you’ve moved residences and are getting rid of old stuff. If all of a sudden you claim part of your mortgage as a deduction, tell the IRS you’ve started a home-based business in the past year. Whatever you tell the IRS, is better than no explanation at all.
I don’t want to scare you off from taking all the deductions you can rightly claim. But at the same time, know that too many deductions can also trigger an audit. The IRS has a computer program which compares your deductions with others in the same tax bracket. The program is called DIF, which stands for Discriminate Index Function. Your DIF score is based upon a secret IRS formula that determines the average number of deductions for a person in your tax bracket. If your deductions are out of whack with what others in your tax bracket claim, your account is flagged. For example, if the IRS determines the average person in your income tax bracket claims $500 in charitable donations, and you claim $8,000, your DIF score will go up. The more your deductions differ from others in your tax bracket, the higher your score will be and the more likely you are to get audited.
I know we all wish to be millionaires one day, but here’s a reason to be glad you’re not one today. Tax filers that earn more than $1 million a year are twelve times more likely to be audited than those that don’t. In 2011, 12.5% of million dollar plus earners were audited. Audits on the rich have more than doubled since 2009. In 2010 only 8% were audited and in 2009, only 6% of millionaires were audited. For those of us earning less than $200,000 per year, rest easy, the audit rate is only 1%.
Here’s to hoping you and I avoid the dreaded audits this year and beyond!
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