Can you avoid tax audit?

As a taxpayer, getting audited by the IRS can be a stressful and frightening experience. An audit means the IRS is questioning the information on your tax return and you may need to provide additional documentation to support the deductions, credits, or income you reported. No one wants the headache and hassle of being audited, so is there anything you can do to avoid catching the attention of the IRS?

What triggers an IRS audit?

The IRS audits only a small percentage of tax returns each year. For individual returns, only around 0.6% were audited in 2019. The chances of being audited vary based on your income, profession, and types of deductions or income you report. Here are some red flags that may increase your risk of audit:

• High income – The higher your income, the more likely you are to be audited. In 2019, the audit rate for those earning over $1 million was about 3%.
• Unreported or underreported income – If you fail to fully report income like wages, self-employment income, or investment income, the IRS computers may catch it and trigger an audit.
• Suspicious deductions – Claiming excessive deductions, deductions that seem disproportionate for your occupation or income level, or deductions that tend to be abused can increase audit risk.
• Math errors – Simple math mistakes may prompt the IRS to take a closer look and audit your return.
• Profession – Some occupations, like small business owners and sole proprietors, are audited more often.
• Tax credits – Improperly claimed tax credits like the Earned Income Tax Credit boost your audit chances.
• Rental real estate – If you report rental real estate losses, you’re more likely to see an audit.
• Cryptocurrency – Cryptocurrency transactions are closely watched by the IRS. Incorrect reporting can lead to an audit.

Can you reduce your audit chances?

While there’s no 100% guarantee to avoid an IRS audit, there are some things you can do to minimize audit risk:

• Report all income accurately – Don’t try to pad deductions without reporting all of your income. Unreported income is a huge red flag.
• Check for errors – Review your return and double check all calculations before filing to avoid obvious math errors.
• Provide documentation – Keep good supporting documentation for the deductions and credits you claim.
• Avoid frivolous tax positions – Don’t take questionable tax positions that seem “too good to be true.”
• Be conservative – Use prudence in the deductions you claim. Don’t deduct anything that seems potentially improper.
• Don’t stand out – Blend in with other taxpayers in your income bracket. Unusually high deductions will raise questions.
• Review prior year returns – If you’ve been audited before, look at those returns to avoid repeating errors.
• Get help when needed – Seek assistance from a tax professional if you have complicated tax situations.

What if you do get audited by the IRS?

Even if you take steps to avoid an audit, you may end up facing one anyway. Here’s what you should do if you receive that dreaded letter from the IRS:

1. Don’t panic – Most audits are routine and not necessarily an accusation of intentional wrongdoing.
2. Read the letter carefully – Verify what specifically the IRS is questioning on your return.
3. Gather relevant documentation – Dig up bank statements, invoices, receipts, or anything else that supports the return.
4. Be responsive – Failure to respond to an audit letter can cause the IRS to make a decision without your input.
5. Consider representation – A tax professional can help guide you through the audit process.
6. Provide what is requested – Only send the documentation the IRS has requested.
7. Communicate respectfully – Hostility will not resolve an audit faster. Be polite in all communications.
8. Negotiate when possible – You may be able to settle certain issues in an audit by negotiating.
9. Appeal if needed – If you and the auditor disagree, you can pursue appeals within the IRS.

Audit outcomes and next steps

Not all audits end with you owing more tax. Here are some common audit conclusions:

• No change – If you provide documentation supporting your return, the IRS agrees and closes the case.
• Adjustment – The IRS makes changes to your return leading to more tax, penalties, or interest.
• Refund issued – The audit uncovers errors made in your favor, resulting in a refund.

If additional tax is owed after an audit, the IRS will explain payment options including installment plans or offers in compromise for those facing hardship. Audits can be stressful, but manageable if handled methodically, politely, and with professional guidance when needed.

Avoiding fraudulent tax return schemes

In addition to legitimate IRS audits, taxpayers should watch out for scams and fraud. Some signs of potential tax fraud include:

• Calls demanding immediate payment and threatening arrest – The IRS does not threaten taxpayers in this way.
• Requests to pay with odd methods like gift cards – The IRS only accepts checks and money orders.
• Emails with links or attachments claiming to be the IRS – The IRS does not initiate contact about taxes by email.
• Requests for personal information over email – The IRS will not email, text, or call seeking personal details like social security numbers.
• Offers to prepare your return for an abnormally low fee – This could be a “preparere” scheme to steal refunds.
• Promises of larger than normal refunds – Scammers lure taxpayers in with inflated refund promises.
• Fake IRS forms like CP2000 notices – Scammers mail fake IRS letters and notices to victims.

The safest way to avoid tax fraud is to file your return directly with the IRS through approved e-file programs or by mailing it directly. Only provide personal information to reputable tax preparers who sign the return as the paid preparer. Report any suspicious IRS contact to the Treasury Inspector General for Tax Administration.

Conclusion

An audit should not be feared, but respected. With some prudence in your return preparation and filings, you can minimize the likelihood of an IRS inquiry. In the rare instance when you are faced with an audit, stay calm, gather documentation, and seek professional guidance if needed. Not all audits end negatively, and they are primarily meant to ensure tax compliance, not to persecute taxpayers.