How to Avoid a Tax Audit by Understanding the IRS's Red Flags

While there's no guarantee that you won't at some point receive an audit letter from the IRS, there are ways to avoid a tax audit by understanding the IRS's red flags for scrutinizing returns. Read on.

Difficulty: Moderately Easy

Instructions

1. Incomplete returns. Make sure your return is legible and has all necessary information, without math errors. Even better, use a tax software that won't allow the return to be filed until it is complete, which eliminates virtually all errors.

2. Incorrect income amounts. All income (wages, dividends, interest, IRA distributions, 1099s, etc.) must be reported on your return. Any discrepancy is a big red flag.

3. Too many deductions. While you should itemize all possible deductions, be careful not to go overboard (just be honest) because too many deductions can be a red flag for an audit. Keep any and all receipts.

4. Small business owner. A taxpayer with a Schedule C can be a target for scrutiny. Be accurate and honest with all business expenses, especially the home office deduction which is a known red flag.

5. Income level. Taxpayers with a salary over $100,000 are more likely to receive an audit letter. If you fall into that category, that's all the more reason to make sure your return is neat, accurate, and backed with receipts and paperwork.