According to the IRS data, six percent of the IRS audits conducted on individuals in 2012 were for people who made between $200,000 and $1 million. There no such thing as “audit-proofing” a return, but the taxpayers can take steps to reduce their chances of facing extra scrutiny from Uncle Sam.
Here are 7 things you can do to avoid getting audited:
- Watch what you tweet. The IRS says that audit decisions are based on the information taxpayers provide on their returns, not what they post on social media. The agency, however, might monitor publicly available information to help with an existing case.
- Report all of your income. The IRS has matching software that can help it catch what was reported under a person’s Social Security number. But even less obvious income (gambling winnings, self-employed income, etc.) should be reported.
- Don’t mix business with pleasure. Self-employed taxpayers need to be careful when writing off business expenses if they don’t want to get a double-take from the IRS. For instance, only 50% of business meal and entertainment expenses can be deducted, and they must be identified as business costs. You should always keep logs of business trips and visits made to clients to work-related travel costs from those incurred on personal trips. The home office deduction has to meet the main requirement of being used exclusively for business and of being the main place of business.
- Pay your nanny taxes. Families who hire someone like a nanny or a home health aide must report such workers and may need to pay Social Security and Medicare taxes and to withhold the worker’s share of those taxes just like any employer. The rules apply to anyone who was paid more than $1,800 last year or $1,900 this year. Often, families don’t realize their error until they’ve parted ways with the nanny; s/he files for unemployment benefits and state authorities learn the person was paid off the books. The noncompliance could result in back taxes and penalties due to the IRS, and possibly a tax evasion charge.
- Don't exaggerate your charitable deductions. If you write off furniture, clothing and other items you donate to charity, you should not exaggerate its value. Clothes and home appliances must be valued at their thrift store prices and not their original sale prices. Pricier items like paintings, homes and land need to be appraised at the time of donation. Donated cars, which are likely to be sold by charitable organizations, will be valued based on the price that the group gets for selling the car.
- Don’t try to write of hobbies. The IRS requires taxpayers to show that their business ventures started with the intention of making a profit. Those who deduct losses for a “hobby” business may be suspected of investing in the hobby solely in order to reduce their tax bill. As a result, they could owe penalties and interest for any taxes they underpaid in the past. Taxpayers can invalidate the IRS’ presumption by proving a business profit made in at least 3 of the last 5 tax years, or 2 of the last 7 tax years.
- Go over the numbers one more time. The IRS scans for deductions that seem out of line with a person’s income and caught 2.7 million math errors on tax returns in 2012. Taxpayers often make mistakes when calculating how much they owe and how big their refunds should be. Many of these errors can be caught early or avoided through electronic filing. It also helps to use exact numbers, since rounded numbers may give the IRS reason to request more specific figures and documentation.