What are the 10 things you can do to prevent being audited by the IRS?
1. The most important thing is to file a professional, meticulous looking return. Whether you use a professional tax preparation service or computer software like TurboTax you want to make sure your return looks carefully prepared. Hand written is a no-no and says "Hey, audit me please!"
2. Make sure you double check for math errors. Another reason to use professional or computer software to help you avoid calculation mistakes.
3. Know your tax preparer- if you file a return with a professional make sure you know them because if they are found to have errors all of their clients will be audited along with them. Do your homework and make sure you find someone who is on the up and up. If you have doubts make sure you have a second opinion before you go on.
4. Explain and document unusual deductions. If you home was destroyed by a earthquake or fire then it is important when filing your tax return to attach the documents you have about the destruction and a newspaper clipping about the it as well. A picture is worth a thousand words so any photos evidence is good as well. Prove anything unusual in all ways you can so that any auditor looking at your return will have all the information he needs to move along. Don't leave any questions in his mind if possible. Think ahead and provide the necessary paper work to prove your claims.
5. Each return is given a computer generated score based on the norms for people in your income bracket and the more you deviate from the norm the higher your score. The top 10% of scores get audited so you want to keep that score as low as possible. If the average person in your tax bracket claims 500 in charitable contributions and you claim 5000 then your score will be higher. If it is true make sure you have the documentation to prove why you are different then most of the people in your income bracket.
6. Report all income and gains. The government receives copies of your W-2's and 1099s and so if you fail to claim them on your tax return you are begging for an audit. Make sure you list all important information on your return from these documents.
7. Report all income from capital gains, retirement cash outs, property sales and gambling winnings. These will all cause red flags if they are left off your return. If you pull money from your 401k or other retirement savings accounts you could also have a penalty to pay so make sure you get tax advice before pulling this money.
8. Be careful and get good advice before you list crazy things as deductions. Just because Cousin Vinnie says you can claim something doesn't mean you really can. Crazy deductions are another way to say "Audit me!"
9. Home office and cell phones are two common deductions that must be well documented and really need some separation from personal use and business use. Hiring someone to measure your home office space and providing you with a written estimate is well worth the cost in satisfying the auditors questions. Cell phones really need to be used only for business to claim them or have great records proving the amount of calls that are business related and the percentage that can be deducted.
10. Make sure you sign your return and check for any mistakes. SSN mistakes or misspellings are all common errors that can get you an audit. Check and double check for accuracy.