Lower Your Audit Risk With These 4 Tax Moves

Maurie Backman, The Motley Fool

For many filers, the most stressful thing about submitting a tax return is the idea of having it audited. Now in reality, less than 1% of all tax returns are audited, but if you want to improve your odds even more, here are a few key moves you should make.

1. Report all of your income

It's easy enough to ignore a 1099 form that comes in the mail listing a small amount of bank account interest, and it's just as easy to sweep income from a freelance gig under the rug. But if you want to avoid a tax audit, your best bet is to report all of the income you earn, even seemingly meaningless amounts. This especially holds true for income documented on 1099 forms, because for each one you get, the IRS gets a copy as well, and if the agency's records don't match what your tax return lists, you can easily get flagged.

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2. Claim deductions that are proportionate to your income

There are a number of valuable deductions you can use to lower your taxable income, but if those numbers seem out of whack, your return might end up further scrutinized. For example, if you're self-employed and report an income of $100,000, but claim $60,000 in deductions, it'll likely raise a red flag. Similarly, if you earn $50,000 a year and claim a mortgage interest deduction on a $750,000 home loan, the IRS might notice that your middle-income salary doesn't align with the cost of your property.

Of course, if you really do have a legitimate number of deductions that make up a large percentage of your income, you should claim them as long as they're well-documented. It could be, for example, that you started your own business and invested a lot of money in equipment your first year to get it off the ground. Just don't be surprised if the IRS asks for proof of those deductions after the fact.

3. Avoid round numbers when claiming deductions

Round numbers are convenient when you don't have actual figures to work with, but in the eyes of the IRS, they're a sign that you're not keeping accurate records and might be misrepresenting the actual numbers at play. For example, if you claim a medical expense deduction of $10,000 because you're not sure exactly how much you spent but you think it's in that ballpark, the IRS might take note of the fact that that number is almost too perfect to be true.

4. File electronically

If you're used to filling out a paper tax return, the idea of filing electronically might seem off-putting. But if your goal is to lower your audit risk, then it pays to get with the times and go the electronic route. The reason? When you file electronically, the software you use is designed to catch mistakes that you may not otherwise pick up on -- mistakes that could subject your taxes to additional review. In fact, the error rate for electronically filed tax returns is less than 1%. For paper returns, it's 21%.

Now some people will tell you that your chances of getting audited are actually lower when you file on paper, because a live person needs to enter your information into a database, and that might take years to happen. Since the IRS only gets three years, in most cases, to audit an old return, that lag might work to your advantage. Still, if your goal is to avoid an audit that arises from mistakes on your part, your best bet is to file electronically and minimize your chances of an error in the first place.

Don't panic

Nobody wants to get audited, and if you follow these tips, you'll lower your chances. That said, if you do get audited, don't panic. Most of the time, all an audit entails is a letter from the IRS and a response from you that helps clarify information on your return. Your chances of having an actual agent come to your door are extremely slim, so if you get an audit notice from the IRS, don't sweat it.

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