Tips for Avoiding an IRS Audit

There are some quick tips I am going to share with you on how to avoid an IRS Audit. I do have to give a word of caution though, I really do believe it is best to have a tax professional do your taxes. The tax code waters can be very tricky and hard to navigate, yet I do understand some people feel better doing it themselves. This is for those people.

Do not file a paper return.

Doing a paper return gives you a much greater chance of their being a math error. Also, if you have bad handwriting, it is easy for something written to be misinterpreted. There are too many good tax software out there to have this is an excuse. According to TurboTax, paper returns have a 21% error rate compared to just 0.5% of e-filed returns. That’s a 41-times-greater chance of making an error and thus being audited by the IRS.

Be careful of filling a home-office deduction.

Probably one of the most abused tax deductions is the home-office deduction used by people with home-based businesses. The home-office deduction is only allowed for space dedicated entirely to your work and not your personal life. So you cannot claim a room that you do both working and have your buddies come over to watch Football

If you are claiming EITC and/or have no adjusted gross income, it could be a trigger.

Low-income folks are considerably more likely to draw tax audits from the IRS than middle-class individuals or families. Individuals and couples with no adjusted gross income are occasionally put under the magnifying glass due to the fraud associated with the Earned Income Tax Credit (EITC). The IRS estimates that between 21% and 26% of EITC payments made each year are fraudulent, while the Treasury Inspector General for Tax Administration found that the IRS made $15.6 billion in erroneous EITC payments in 2015. In the upcoming year, the IRS will be delaying the tax refund checks of EITC recipients Opens a New Window. in an effort to reduce the amount of inherent fraud with EITC payments. Though only 1.8% of returns in 2014 reported no adjusted gross income, 5.26% of those were audited by the IRS.

If you make more than $200,000 you also a target

Let’s face it, there is a bigger payoff for the IRS with higher income families, so naturally they also fall on the IRS radar. In 2014, there was a threefold jump in the audit rate between the $100,000-$199,999 ‘;adjusted gross income range and the $200,000-$499,999. Furthermore, audit rates for those earning more than $1 million, $5 million, and $10 million were 6.21%, 10.53%, and 16.22%, respectively, in 2014.

Watch your losses and expenses filling as self-employed

Mounting schedule C losses could also catch the eye of the IRS. Especially write-offs that result in ongoing losses could draw the attention of the IRS. A business that regularly posts losses year after year may be classified as a hobby, which would wipe out the net loss on your original tax return and leave you to pay additional taxes, penalties, and interest.

Your charitable contributions should not be disproportionately high compared to your income

For higher income taxpayers, giving to charity has double benefits. It not only furthers your cause, but it also provides a deduction that’s proportionate with your highest marginal income tax bracket. What’ll draw the attention of the IRS and possibly trigger an audit is if you’re donating an abnormally large amount of your income annually. For example, if you make $50,000 annually, but are claiming $15,000 in charitable contributions, that’s liable to draw the attention of the IRS. As one extra note, make sure you have documentation for every charitable contribution you make in case the IRS comes calling.