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8 tips to avoid an audit

While fewer than 1 percent of all tax returns are audited, there's no guarantee you won't appear on the IRS' radar. But there are ways to reduce the risk.

By MSN Money Partner Jan 22, 2014 2:14PM

By Allison Martin, Money Talks NewsMoney Talks News

Wouldn't it be nice if the IRS released its secret formula for how it selects individual tax returns for audit? That way, we'd do everything we could to stay under the radar and not be selected for further review.

Fewer than 1 percent of tax returns are audited, which is good news for all. But there's no way to guarantee you’ll be exempt from the IRS' prying eyes, so all you can do is take the proper precautions and hope for the best.

1. Shady preparers

If you don't prepare your own return or take advantage of the free help that is available if you make $52,000 or less, chances are you will entrust someone else with your information to prepare your return. Just make sure the individual is legitimate, or you may end up in the IRS' hot seat.

How do you spot a shady preparer? If they make ridiculous claims, like guaranteeing that all of their clients will get refunds, you definitely want to seek other options.

2. Business or hobby?

Have you been in business for at least three years and your tax return still reflects a loss? Chances are the IRS may view your business activity as a hobby, which is another red flag.

And if you used a Schedule C to claim your losses instead of incorporating, that also increases your chances of being placed under a microscope by the IRS.

So, what are you to do if your business is really losing money because it's a startup or as a result of economic conditions? Take the deductions you are entitled to, but maintain adequate documentation to substantiate your claims.

Man examining a letter © Digital Vision, Getty Images3. Too much generosity

Perhaps 2013 was the year of giving, and you doled out large sums of cash that were disproportionate to your income? Your actions may raise a few eyebrows at Uncle Sam's headquarters.

According to IRS Publication 526, charitable deductions are limited to 50 percent of your adjusted gross income, with 20 and 30 percent limitations applied in some cases. And if your individual contributions are $250 or more, you must keep a bank record showing the donation or a document that includes your name, the date the gift was given and the amount.

4. Cash earners beware

If you are employed in a position that works for tips, such as a bartender or restaurant server, it is important to understand that all tips received must be reported as income; it is against the law to do otherwise.

While it may be possible to understate income, the IRS has a certain threshold that it expects servers to meet, and any amount substantially less may raise a high level of concern, and possibly trigger an audit.

5. Typographical errors

Didn't double-check your tax return for accuracy? The IRS may be coming for you if mistakes are present.

Common audit flags include incorrect Social Security numbers and employer identification numbers, transposed figures and mathematical errors on the face of the return. Word to the wise: Review your return carefully to ensure that the information you plan to submit matches the corresponding tax documents, as a simple mistake can land you on the audit list.

6. Unreported income

What the IRS has on file should match the face of your return, so refrain from omitting any form of income that you earned. And don't assume that because the company didn't give you a W-2 or a 1099 statement, you're off the hook, because it more than likely wrote off the expense.

Having a hard time retrieving the documents? Give the company a ring. Still no luck? Call the IRS and I'm almost certain they'd be happy to assist.

7. Tax credits

Unfortunately, shady tax professionals can use tax credits to make good on fraudulent promises. For instance, improper use of the Earned Income Tax Credit amounts to more than $10 billion a year. The Wall Street Journal says:

The EITC's complex rules help lead to high error rates by taxpayers and even paid preparers. It's also vulnerable to fraudulent claims, despite some elaborate safeguards that have been built in over the years.

The Journal also says:

The IRS said in (a) statement Monday: "Every year, the IRS conducts 500,000 EITC audits as part of a broader enforcement strategy, and EITC claims are twice as likely to be audited as other tax returns."

Of course, it's OK to claim credits that you are indeed eligible for, but be sure to read the IRS guidance to ensure you qualify.

8. High income

Making more money may cause problems, at least from an audit risk perspective. CNBC says:

People who earn more than $1 million a year are more than 12 times more likely to be audited than people who earn $200,000 or less. About one of every eight tax filers making $1 million or more were audited in 2011 -- double the rate of 2009.
But a new report says the IRS should be targeting the wealthy even more.

Check out this 2012 chart on CNNMoney about the chances of being audited broken down by income.

I've been selected for an audit. Help!

If the folks at the IRS decide you are the perfect candidate for an audit, take a deep breath and relax, as an audit does not mean you are doomed. Reply to the questions in their interview in the best manner possible, and use the documentation you have on hand as supporting evidence if requested.

Also, take a look at the IRS literature on audits along with this video to learn more about the process. And if you need assistance, be sure to complete the Request for Taxpayer Advocate Service Assistant, or Form 911 (.pdf file).

If you've been audited by the IRS, let us know about your experience in the comments below.

More on Money Talks News


Jan 22, 2014 3:08PM

Best way to avoid an audit.


#1- Don't be a member of a conservative Group like the tea party.


#2- Worship Obama like that looser BRENT does


#3- Do not be unethical and claim things that are not true (unlike Obama)


#4- For some of you on Welfare, Crack expenses for your ho's can not be deducted.


Things you should do while preparing  your tax return.


#1- If you are going to ask help from the IRS be sure to take a month off because if you call the hotline you will be on hold for that long.


#2- Brush up on your india-english because next year that is who will be answering your call.


#3- If you end up in an audit buy lube before hand because the IRS

Jan 22, 2014 5:55PM
The IRS has perpetrated an image that induces fear in taxpayers.  Folks, these people are no smarter than you or I.  And, they don't know ALL the tax codes, nor do they all interpret them alike.  If audited, keep your cool, think about your responses, and challenge the auditor to show you, and explain exactly why a particular item that is being challenged is wrong.  If they are going to question why you are in error, they should be able to clearly demonstrate exactly why they made that judgment.  Having entered into a variety of enterprises over the years, I have been audited.  Sometimes they were right, sometimes we were right.  Use your experience to learn more about the lax laws.  Instead of you digging through thousands of pages of codes, rules, and regulations, let them do it and let them educate you in the process.
Jan 22, 2014 4:00PM

I'd just like to add:

Don't ever, ever, vote for an Independent Candidate who openly calls the IRS and income tax fraudulent, like Ron Paul.

If you do your tax return will be late. You will be summoned to jury duty (possibly twice within a short time frame). The IRS will audit you or simply send a letter asking for "clarification" about a none existent problem with a record that you already gave full account for; a record they could just as easily clarify with your employer for since you're on their pay roll.

Social Security Numbers: The Government's best tool to track someone.

Jan 22, 2014 5:07PM
One tip to take is Never say Never been audited. It's as simple as Murphy's Law. If any thing goes wrong including the IRS, it will!
Jan 22, 2014 5:40PM
If you don't want an audit, you will probably get audited.  Keep good records and document your questionable deductions to remind you why you used it.  If you get stuck with a penalty, during an audit, suck it up, pay it, and go on with life - lesson learned.  On the other hand, remember that the IRS is shown to be wrong 50% of the time.  If you doubt the auditor's conclusion, before paying the bill, check it out with an expert tax preparation professional - they-re less often than the IRS.
Do as the corporations that run this country do, rent an office space in Ireland where taxs are less than half. Don't actually have to be there, its in the paperwork. Conduct business in the states as usual. In other words, use the loopholes congress has  established that benefits corporate crooks. They were paid generously and you should take advantage of their self serving brilliance. Me, well I operate my import business from Mexico and only pay a simple fee at the border.  I don't often want to see a country snort its way to ruin, but when I do, its the United States.  Stay thirsty my friends
Jan 22, 2014 5:29PM

Don't criticize Obama.

Don't criticize  Obamacare.

Don't criticize liberal Democrats

Don't criticize Democrats.

Don't be a small business owner who criticizes Obama.

Don't be a small business owner who criticizes Obamacare.

Don't have cancer, and criticize Obama.

Don't criticize the IRS in a social media forum.


Jan 22, 2014 6:45PM
Never file taxes, worked for me for over 60 years!
Jan 22, 2014 3:58PM

PurpleAardvark58...Why the obsession  with President Obama?

This article is about avoiding an audit, which is very helpful. Take

your obsession some place else...maybe a political website is best

for you. This is not the place. All your doing is making a fool of yourself.

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