An income tax audit is defined as the examination of a business or individual tax return by the Internal Revenue service or state tax authority. Tax audits are frequently performed to make sure that people are reporting tax information correctly. Here are three ways to avoid income tax audits.
Be honest in what’s reported
Per sgp.fas.org, less than 1% of individual income tax returns are selected for audit each year. They report that the audit rate has fallen for all income groups since 2010, but it has declined most for high-income taxpayers. Though the IRS still audits a greater share of high-income filers than low-income ones, low earners who claim the Earned Income Tax Credits (EITC) face much higher audit rates than other taxpayers with similar incomes. Claiming EITC is for qualifying people whose income is low-to moderate. Claims may be audited for credit. While being under scrutiny can trigger aggravation or stress, those who are truthful and accurate have little reason for concern.
Avoid math & reporting errors
Nerdwallet shares, “The IRS conducts tax audits to minimize the “tax gap,” or the difference between what the IRS is owed and what the IRS actually receives.” While tax returns may be randomly selected for audits, most often the IRS is searching for suspicious returns or those that simply are done incorrectly. This affords them the opportunity to collect taxes from people who make mistakes. Thus, it is essential that when preparing returns, numbers are triple checked. Also, be sure that the numbers you are reporting to the IRS are accurate. To prevent mistakes, use a professional tax accountant to prepare your returns or use tax preparation software that reduces the chances of errors.
Support what you report
Charitable contributions and donations generally help taxpayers lower their taxable income through tax deductions. The amount of charitable donations one may deduct can range from 20% to 60% of adjusted gross income. In some circumstances, contributions that exceed the limit may be deducted from tax returns over time through something called carryover. Individuals and businesses must itemize contributions and donations on tax returns. Moreover, they must have physical proof to support these actions. Per Kiplinger.com, “The IRS knows what the average charitable donation is for folks at your income level.” They share that taking large charitable deductions that are disproportionate compared with income raises red flags for audits.
Fly under the radar
Though the IRS actively audits less than 1% of individual tax returns, it can be stressful to be in that group. It can also be a time-consuming and costly process when returns are complex. To reduce your chances of being audited, it is essential to be truthful when filling out and filing your tax returns, avoid math and reporting mistakes that may prompt unwanted attention, and be able to support fully and honestly everything you report. While there is no real way to predict whether you will be audited, it’s likely that if you stick to those three principles, and your tax return doesn’t stand out for odd reasons, your chances of being audited will likely be reduced.
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Disclosure: This article is purely informational and is not intended as a financial resource or substitute for professional advice.
