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Triggering a Tax Audit | What Not to Do

Updated on
February 18, 2021
Article written by
Attorney Kevin O'Flaherty

This article will discuss twelve methods for avoiding an audit by the IRS. We will cover strategies related to the following:

 

  • Understanding the audit selection process
  • How to file to avoid an audit
  • Proofreading your return

 

Don't fear the audit. If you're not engaged in illegal activity, you have little to fear beyond some extra administrative work. That being said, having your financials reviewed by the IRS isn't ideal. There's no guaranteed strategy to avoid an audit; roughly 1% of taxpayers are audited each year. However, understanding what the IRS looks for when considering an audit can go a long way to avoiding a tax headache. To learn more about your rights as a taxpayer, check out our article, "What Are My Rights As A Taxpayer If Audited?"

 

Understanding the Audit Selection Process

 

  1. Understand the process: The audit selection process is not entirely random. While some individuals might get thrown in at random to avoid selection bias, the IRS uses a program called the Discriminate Income Function (DIF). The DIF program compares your return against others in your tax bracket. Don't worry; even if you feel like you're taking too many deductions or your deductions are unusual, you'll be just fine if you have the documentation to back everything up.
  2. Know if your job or business increases your likelihood of an audit. Suppose you're an employee of a cash business, such as a waitress, hairdresser, or massage therapist, or you own a business that keeps its books (accountant, doctor, or just about anything else). In that case, your chance of being audited is already higher.
  3. Self-employed taxpayers are at greater risk. Incorporating or forming a limited liability company may decrease your odds of being audited versus filing a Schedule C. Small businesses carry a higher percentage of audits because history shows they tend to commit a greater number of violations, often unintentionally.

 

How to File To Avoid An Audit

 

  1. Give extra information. If your return is significantly different from previous years, such as if your income is much higher, your charitable deduction is considerably higher, your dependents changed, etc., you should include extra documentation, receipts, and worksheets that explain the inconsistencies from previous years. Your chance of being flagged by the DIF software may still be higher 
  2. Avoid superfluous deductions. Understand that some of the most common red flags that trigger an IRS audit are home office deductions, medical expenses, business travel, entertainment expenses, casualty losses, debt expenses. Just because the IRS is more likely to zero in on deductions for these categories doesn't mean you should avoid them. However, don't go overboard, and don't try to game the system.
  3. Be careful of amendments. Amendments are meant for honest mistakes, but that doesn't mean they won't catch the eye of an IRS agent. Also, when reviewing an amendment, the agent will usually check the original return.
  4. File at the right time. Filing at the right time depends on your personal preference and if you anticipate a large refund. If you know that you'll get money back and want that money sooner than later, then file it right away. However, if you expect to owe the IRS, there's no rush to file. Just understand that everyone has to pay by April 15h. If you miss the deadline and fail to file an extension, you might as well paint a target on your back.
  5. Don't forget about interest-generating accounts. For most people, the interest generated in a savings or checking account is negligible; but it can throw a wrench in an otherwise clean tax return for others. 
  6. Keep your records if you claim the Earned Income Credit (EIC). It's good practice for all taxpayers to keep their return records for at least seven years. Having the documents on hand and ready to go can make getting through an audit much more manageable. Those who claim the EIC must still file a tax return even if they don't owe money and are not technically required to file. Claiming the EIC increases your chance of being audited because of the program's benefits and the history of individuals abusing the program.

 

Proofreading Your Return

 

  1. Double and triple check your math. You may be good with numbers, but be sure to break out the calculator and check your work. Your numbers need to match the forms submitted to the IRS by your employer. Numbers that fail to match up will trigger a red flag in the DIF software. 
  2. Don't be sloppy. Don't round off your numbers, and make sure you write as neatly as possible. An illegible return is a surefire way to draw the ire of an IRS agent. 
  3. Fill in every space required, even if the answer is zero. 

 

Taking all the above precautions won't guarantee an audit free life, but it should decrease your chances. Using an accounting service, being honest on your return, and keeping organized records will help you if you are selected for an audit. If you have any questions about tax law and audits, give us a call at (630) 324-6666 or contact us online to learn more. 

 


Triggering a Tax Audit | What Not to Do
Author

Attorney Kevin O'Flaherty

Kevin O’Flaherty is a graduate of the University of Iowa and Chicago-Kent College of Law. He has experience in litigation, estate planning, bankruptcy, real estate, and comprehensive business representation.

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