How to keep the IRS from challenging your tax returns
Just the idea of an income tax audit is enough to send most people into a panic. Fortunately, there are a number of things you can do to lessen your chances of being audited and breathe easier during tax season.
- Stay honest. This is obvious, but important, advice—not cheating on your taxes is the best way to keep from being audited, and also the best way to make it through an audit if you get targeted anyway.
- Keep a paper trail. Retain documentation for everything you deduct, including travel logs, meal receipts, and other business-related expenses. Ensure that you have accessible copies of your tax returns going back at least seven years.
- Don’t claim excessive charitable contributions without supporting documentation (this is one of the “triggers” for the IRS to initiate an audit).
- Follow the directions carefully on all tax forms. Check and double-check your tax returns. Factual or mathematical mistakes can serve as red flags for the IRS.
- Don’t skip any declarations, including 1099s for self-employment income. Today’s computerized IRS cross-checks tax return items with employers and other sources, and can easily detect things that have been left out.
- If possible, avoid claiming your home as a business expense. This can also serve as an audit trigger.
- Resist the temptation to pass off a hobby as a losing business. The IRS provides clear guidelines for distinguishing between hobbies and businesses—make sure you’re following them.
- Don’t panic. If you receive a letter from the IRS after filing your taxes, it’s probably because you forgot to sign something or neglected to include a necessary form. If it is an audit, and you’ve filed honestly, you’ll have less to worry about.
The good news is that the IRS is performing fewer audits than before. You have approximately a one in 200 chance of being audited, as compared to one in 60 in 1996, and one in 112 in 1999. Take the time to file your taxes as completely and accurately as possible, keep copies of your records, and your odds will improve even more.
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