How To Avoid An IRS Audit

By MySpendingPlan.com Editorial Staff

IRS Audit - these are probably the two most dreaded words for a tax paying American.  If the IRS comes knocking on your door, your worst nightmare will probably be realized.  But the good news is that most people have a small chance of being audited by the IRS.  Even so, why take the chance.  Avoid heavy penalties and interest.  Remember that the IRS (and your state or local government tax department) always expects to be paid first (by law), ahead of all your other creditors.  Here’s what you can do to protect yourself from an IRS audit.

Tips To Avoid IRS Audit

• File your returns using the correct IRS tax forms.  Many people use the wrong IRS forms, which means your returns are not filed properly.  This could lead to an audit.
• Make sure that you report the correct numbers on your returns, right down to the last dollar.  Do not round off the numbers so that your return looks neater.  This leads the IRS to think that you have estimated the numbers and are not reporting true figures.
• Keep your returns neat and legible so that you do not have to physically explain them.  A good way to ensure this is to file IRS returns online.
• Do not list too many itemized deductions.  This is a major red flag for the IRS.  Do take all the deductions that you are entitled to, but if they are too many, try and avoid the ones that do not lower your tax bill by much.
• Keep all receipts of payments, especially cash payments.  Many credit card companies and banks will also offer a year end statement of your expenses.  When you take any deductions, it is important to have proof that justifies those deductions.  So whether you are taking deductions for some medical expenses, restaurant expenses, or any other kind of expenses, make sure you have the pharmacist’s receipts, restaurant bills and all other documentation to prove that your deductions are valid.  Create a file and put them all in there!
• Do not claim deductions for payments that have not actually been made.  For instance, there was a person who did some repair work on the computers in his office and claimed deductions for that repair work.  The amount he claimed as deductions was what he would have paid the repair guy.  However, since he actually did not make any payment, the deductions were not valid, which cost him greatly in tax penalties.
• Claim business expenses and home office deductions with great care.  This is one area that really gets the attention of the IRS since so many people abuse these deductions.  As the rules for home office deductions are quite complex, it is best to consult a tax advisor as to what you can claim as legitimate expenses and what you can’t.  It is safe to say that only those expenses that are incurred mostly due to your business can be claimed as business expenses.  For instance, if your home office has a computer, make sure you claim that as a business expense only if the computer is used mostly for business work.
• Take care to sign your returns.  Without a signature, the return is not deemed as filed and will attract more scrutiny from the IRS than you want it to.  Joint returns should be signed by both filing parties.
• Use tax software like TurboTax or H&R Block TaxCut to prepare your returns, if you cannot afford a tax professional.  They contain lots of advice, error checking and questions that make sure you only take legitimate deductions.  You can even deduct the cost of this software.
• Consider electronic filing.  It is more accurate and you can get your tax refund much faster.  Electronic filing costs can usually be deducted too.

An IRS audit can be a frightening experience, but with the above mentioned tips, you can avoid one.  And if you are completely honest when disclosing your income and claiming deductions, you do not have to worry about an IRS audit even if it does happen to you.