There’s no two ways about it – filing your taxes is stressful all on its own, but the looming threat of an audit and/or penalties takes it to a whole other level. While there’s no surefire way to guarantee you’ll never be audited, there are certain steps you can take to reduce your chances significantly. Here are five crucial action items:
1. Double-Check Your Numbers
Accuracy is key when it comes to your tax return. Even simple mathematical errors or incorrect data entry can trigger an audit. Before you submit your return, go through all your numbers with a fine-tooth comb. Use tax software that automatically checks for errors, or consider hiring a professional to review your return. Ensuring that your calculations are correct and that all information is entered accurately can save you from unnecessary scrutiny.
2. Report All Your Income
Failing to report all your income is a red flag for the IRS. This includes not just your primary job but also side gigs, freelance work, and investments. The IRS receives copies of the W-2 and 1099 forms that you receive, so they can cross-check your reported income. Make sure you have accounted for all sources of income. If you receive income in cash, keep detailed records and report it honestly.
3. Be Careful with Deductions and Credits
While deductions and credits can significantly reduce your tax liability, they also come under close scrutiny by the IRS. Claiming unusually high deductions or credits compared to your income level can be a red flag. Ensure you are eligible for every deduction and credit you claim and maintain detailed documentation to support your claims. If you have substantial deductions, such as charitable donations, medical expenses, or business expenses, be prepared to provide proof if asked. (see #5)
4. File on Time and Pay Any Taxes Owed
Filing your tax return on time and paying any taxes owed by the deadline can help you avoid unnecessary attention from the IRS. Late filings and payments can lead to penalties and interest, and they might increase the likelihood of an audit. If you cannot file on time, request an extension, but remember that an extension to file is not an extension to pay. Paying as much of your tax liability as possible by the original due date can help minimize penalties.
5. Maintain Thorough Records
Good record-keeping is crucial in case the IRS questions your return. Keep all receipts, invoices, bank statements, and other documentation that supports your income, deductions, and credits. Typically, you should keep these records for at least three years from the date you filed your return, or two years from the date you paid the tax, whichever is later. For certain situations, such as if you underreported income by more than 25%, the IRS can go back six years, so keeping records for a longer period might be prudent.
While there’s no guaranteed way to avoid an audit, following these five tips can significantly reduce your risk. Being meticulous about accuracy, reporting all your income, being cautious with deductions and credits, filing and paying on time, and maintaining thorough records are all essential practices. By taking these steps, you can navigate the tax season with greater peace of mind and lower the likelihood of facing an audit.