Reports of IRS staff shortages have convinced many people that tax audits are becoming increasingly rare. While the odds of being audited are less than 1-in-100, most of us would rather not risk one. Here are four ways to avoid being singled out for an audit:
1. Be Honest
While this may seem like pretty straightforward advice, the temptation to fudge can be very strong. Don’t conveniently forget to declare a large sum of money from a freelance job or creatively classify your new man-cave as a home office. If you’ve done a large freelance job, even if you were paid in cash, it’s safer to declare the income. Likewise, If you don’t use your home office regularly and exclusively for business purposes, it’s a bad idea to tell the IRS you do.
2. Be Middle Class
You can’t really control this one, but the truth is that if you earn below $200,000 a year, you’re less likely to come under the scrutiny of the IRS. Conversely, people with annual incomes in excess of $1,000,000 have a 1 in 9 chance of being audited. At the other end of the spectrum, some low income households are at an increased risk of an IRS audit for claiming the Earned Income Credit. Designed to provide tax relief for the working poor, the EIC carries some complex requirements—so be sure you meet the criteria before taking this credit.
3. Be an Employee
Working for someone other than yourself lowers your risk of an audit. This is because self-employed filers prove more likely to under-report income and write off dining, entertainment and travel expenses. Other individuals at risk of an audit are owners of small businesses that tend to deal primarily in cash. And whether you’re self employed or not, you also risk an audit if you make large cash purchases or deposits.
4. Be Conscientious
Math errors, entering the wrong figures on forms, or forgetting to declare income that generates a 1099 Form can put you on the audit radar. E-filing is one way to reduce errors on your returns (compare the 21 percent error rate for paper returns with the .5 percent error rate on e-filed returns).
Obviously, people who love running their own businesses or who make more than $200,000 a year aren’t going to alter their lifestyles just to avoid a tax audit, but being transparent and avoiding errors on your return can help reduce the risk.
Note: The information contained in this blog is not intended as a substitute for the advice of a qualified tax professional.
How do you make sure you’re filling out your tax return accurately? Leave a comment and let us know.