No likes the idea of going through a tax audit. Indeed, many of us get downright nervous about being audited. There is no way to completely avoid an audit; some IRS audits are performed randomly. You never when your number will come up. Most audits, though, are performed because of some red flag the IRS sees when looking at your tax return.
If you want to reduce the chances that you will be audited for something that is in your tax return, you will need to be careful about you fill out the forms. For the most part, avoiding IRS red flags is fairly simple: Only take the deductions and credits you are actually entitled to, and double check your return for mistakes.
IRS Audit Red Flags
In addition to large deductions relative to your income, tax credits (like the EIC) that you might not be entitled to, and mistakes on your tax return. there are a number of other red flags that are avoidable:
- Claiming a business loss on Schedule C regularly. A sole proprietorship filling out a Schedule C might be expected to claim a loss for a couple of years. However, if is
seems to be a habit (and there are computers to help figure this stuff out), you might be audited one year. Business use of your home used to be a big red flag, but with the recent increase in home businesses, this isn’t as big a deal.
- Failing to report all your income. Remember that you are expected to report everything you make. Even if you don’t receive a 1099, you should still report the income. The government may have a copy of the 1099, or the government may come looking. Don’t forget that, soon, PayPal will have to begin reporting transactions to the IRS.
- Handwritten tax form. The IRS has found that handwritten forms are more likely to contain mistakes. You can have a tax preparer put together your return (avoid a preparer that has been red-flagged by the IRS), or you can use tax prep software. The IRS even has fillable forms available for free.
And, because the IRS wants you to e-file, it is worth noting that these returns are less likely to be audited. (Although you could still be hit with an audit for red flags or randomly.)
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