Tax season is now upon us, and every American's goal - other than getting the highest refund possible - should be to make sure that the season actually ends on April 15. There aren't many financial hurdles more unpleasant than an audit, so if you want to avoid one you're going to have to take the necessary time and energy to file an accurate return. The IRS examined more than 1.6 million tax returns in 2012, according to its Data Book, and even though that only represented approximately 1% of all returns filed, the risk does exist. To avoid the penalties, interest, and inconvenience associated with an audit, follow these eight tips.
1. Complete Your Return
If you plan on filing your return manually, double-check to make sure you've completed every single line - if something doesn't apply, simply write in zero. Blank spaces on your return could be enough to trigger a tax audit.
2. Be Accurate
Set aside a dedicated time to prepare your return so you can focus and hopefully avoid careless mistakes. Enter exact amounts instead of rounding figures up or down, and double-check all of your math once your return is complete. Select the correct filing status - determined by your marital status on the last day of the tax year - claim all dependents, and make sure you meet any deduction guidelines before you take them. This year, for example, the threshold for writing off unreimbursed medical expenses is 10% of your adjusted gross income, up from 7.5% last year.
Be sure to complete your state return just as carefully as your federal - a state audit can trigger one from Uncle Sam. By filing your return correctly you not only help yourself avoid an audit, you eliminate the need to file an amended return.
3. Understand the Home Office Deduction Fully
If you work from home, be sure you qualify for the home office deduction before you take it. According to IRS rules, your office must be for "regular and exclusive" business use, among other things.
If you're unsure whether your office is eligible, enlist the help of a tax professional for advice. If you are certain, but you don't want to tackle the complex computations necessary to take the deduction, the IRS now offers a simpler option: Deduct $5 for every square foot of your office space, with a cap of $1,500. Of course, this may limit your tax benefit if you could deduct more than that.
4. Keep Bullet-Proof Documentation
When it comes to deductions and credits - whether charitable contributions, business meals, or unreimbursed medical expenses - make sure your receipts are dated and specific. If they're not, include handwritten notes. This may not help you avoid an audit if you file electronically, but it can certainly help you get through the process unscathed.
5. File in Person If You're Unsure
The convenience afforded by filing your taxes online is certainly appealing, but if you have any questions or doubts, put your mind at ease by using a CPA, an H&R Block or Jackson Hewitt agent, or another tax professional. If you do go with one of the big tax preparation agencies, request an interview with someone who has experience with your specific concerns. Many firms charge a flat fee, or charge per form, which means you're paying the same amount no matter who you're assigned to. By requesting a more seasoned or specialized professional, you reduce your chances of an audit and maximize your potential refund.
6. Value Your Charitable Contributions Accurately
A cash donation is easy to value - it is what it is, as the saying goes. However, if you're deducting actual items you've donated, be sure to value them accurately. Many large non-profit organizations that accept donations - The Salvation Army and Goodwill are two of the biggest - either provide calculators or suggest ranges for specific items.
Many tax preparation software programs also offer guides to help you determine the value of your donations, as well. Regardless of how you file your taxes, it's essential that you not only keep receipts from all of your charitable contributions, but that you also keep a list noting the details and condition of all donated items.
7. Sign Your Return
This is an obvious one, but sometimes the most obvious guidelines are the ones most easily missed. If you forget to sign your return, the IRS may be curious if you've "forgotten" anything else. So, be sure to sign on the dotted line.
8. Don't File at the Last Minute
Don't believe the myth that filing at the last minute helps you avoid an audit. If you procrastinate, you're only increasing your chances of making an error - something that can definitely trigger an audit. Your best bet is to complete your return in advance, but wait to file only if you owe a balance, so you can maximize the time-value of your money.
Above all else, be honest. Trying to sneak through a deduction you're not entitled to, charging personal expenses to your business, and not declaring all your income simply are not worth the risk. The penalties for tax fraud and evasion are significant, and may include jail time. Take all of the above precautions to help prevent an audit - just make sure you're being truthful every step of the way.
What tips do you know of for avoiding an audit?
Kenneth Day resides in South Carolina and writes about money management, taxes, and small business accounting.