How to Avoid a Tax Audit

Carla Fried

In the broad spectrum of pain and dread, the prospect of an audit probably falls somewhere past a root canal. I mean, could there be anything less fun than having to defend yourself to the tax police? Sure, just 1 percent or so of all individual tax returns end up the focus of an audit—the rate rises along with your taxable income-but make any of the following filing flubs and you could find yourself among the unlucky:

1. Muffing up the Math. Sounds ridiculously simple, but if for some reason you aren't using software, or a CPA who uses software, any math error—no matter how innocent—will set off the IRS detection alarms. That just increases your odds that your return might then find its way into the “audit” pile. 
2. The value of your itemized deductions is suspiciously large given your income. The IRS has a secret computer sauce that kicks out returns for potential review if the value of deductions is out of whack with your income. If you are legitimately entitled to a deduction and you have the backup documentation to make your case, by all means claim it. Just know the IRS or your state tax authority may, um, have some questions.
3. Under-reporting income. If you have a side hobby or consulting work that brings in income that isn't subject to withholding tax, be extra careful you declare that money come tax time. Failure to report income that a client reported to the IRS was paid to you –remember you did give the client your W-9 with either your Social Security or Employer Identification Number for reporting purposes – is going to be a huge red flag. If you’re self-employed, be extra careful reporting all income; as a general rule the IRS tends to take an extra careful look at self-proprietors who file a Schedule C Profit/Loss with their 1040.
4. Non-Cash Charitable Contributions. Any non-cash donation (a car, a painting, designer clothes etc…) valued above $500 requires that you file a Form 8283. And when the IRS sees that form it tends to want to take a special look-see at your return. That’s not a reason to forego the donation; just be super straight-up in how you valued the donation, and make sure you have the necessary documentation to make your case.
5. Aggressive Home-Office Deductions. The fact that you sit on the couch in the den while pounding away on your laptop to complete a work project does not qualify the den as a home office. You must have a dedicated space that is exclusively used for work, to be able to legitimately claim the home-office deduction.