How to Avoid an IRS Income Tax Audit
An audit is a detailed review of your past financial activities and personal accounts, and can seem like a significant and stressful invasion of your time and resources. While in some cases you may be audited because you were randomly selected, in most cases an audit is initiated because there seems to be something missing or incorrect about your past return. The best way to limit the possibility of being audited is to provide complete and accurate tax returns in a timely manner.
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Instructions
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File your returns in a timely fashion. As soon as you file your return, the statute of limitations on audits begin to run. As of the day you file, the IRS generally only has three years to audit your returns. In some cases with especially large apparent mistakes, they can go back as far as six years. However, if you do not file any return, the IRS can audit that return at anytime without restriction.
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Make sure that the information on your tax return matches the other information that the IRS has. When you receive certain cash payments, such as wages and dividends, you and the IRS receive a copy documenting what you received and what taxes you have already paid on that amount. If there is a discrepancy between what you report about a transaction and the documentation the IRS received about the transaction, you will be selected for an audit.
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Do business with trustworthy and detail-oriented individuals. Even if you might not have made any mistakes on your tax returns, you might be audited because of the returns of business partners and investors. You should always do due diligence investigations into possible partners and investors, not only to protect against tax audits, but to insulate yourself from other suits and legal issues.
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Complete your tax return carefully to minimize errors and provide sufficient documentation to support any deviation from the norm. Some errors, such as simple math errors, will not trigger an audit because the IRS has the authority to fix the mistake and make the necessary adjustments. However, some errors are more substantial and could be because of a variety of reasons, ranging from a simple mistake to an active attempt to defraud. If your return deviates from the norm for similar returns, it will be looked at by an IRS auditor to determine if an audit is required. If you had a unique transaction that occurred over the year, provide all relevant documentation showing what occurred. This will allow the auditor to understand what occurred during the year and should make an audit unnecessary.
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Tips & Warnings
If you have further questions about the audit process or are going through an audit yourself, it is a good idea to consult with a certified public accountant or licensed attorney, as they can best address your individual needs. If you have financial concerns that might make hiring a CPA or attorney difficult, there are alternative options such as Low Income Taxpayer Clinics or the Taxpayer Advocate Service, an independent organization operating through the IRS that provides aid to taxpayers under duress. Contact the IRS to find an LITC or TAS representative near you.
