Six Tips for Avoiding an Tax Deduction Audit

The following are six things you can do to minimize your chances of getting your tax deduction being audited.

If you file by mail (as you should) and submit a tax return that looks professional, this will help you avoid unwanted attention from the IRS . Your return shouldn’t contain erasures or be difficult to read. Your math should be correct. Avoid round numbers on your return (like $100 or $5,000). This looks like you’re making up the numbers instead of taking them from accurate records. You should include, and completely fill out, all necessary forms and schedules. Moreover, your state tax return should be consistent with your federal return. If you do your own taxes, using a tax preparation computer program will help you produce an accurate return that looks professional.

Tip #2: Mail Your Return by Registered Mail

Mail your tax return by registered or certified mail, return receipt requested. In case the IRS loses or misplaces your return, your receipt will prove that you submitted it. The IRS also accepts returns from four private delivery services: Airborne Express, DH L Worldwide Express, Federal Express, and United Parcel Service. Contact these companies for details on which of their service options qualify and how to get proof of timely filing.

Tip #3: Don’t File Early

Unless you’re owed a substantial refund, you shouldn’t file your taxes early. The IRS generally has three years after April 15 to decide whether to audit your return. Filing early just gives the IRS more time to think about whether you should be audited. You can reduce your audit chances even more by getting an automatic extension to file until October 15. (However, starting in 2008, partnerships and S corporations may receive an automatic extension only until September 15 (five months, instead of six).) Note, however, that filing an extension does not extend the date by which you have to pay any taxes due for the prior year—these must be paid by April 15.

Tip #4: Don’t File Electronically

The IRS would like all taxpayers to file their returns electronically— that is, by email. There is a good reason for this: It saves the agency substantial time and money. Every year, the IRS must hire thousands of temp workers to enter the numbers from millions of paper returns into its computer system. This is expensive, so the IRS only has about 40% of the data on paper returns transcribed. The paper returns are then sent to a warehouse where they are kept for six years and then destroyed. The IRS makes its audit decisions based on this transcribed data. By filing electronically, you give the IRS easy electronic access to 100% of the data on your return instead of just 40%. Moreover, if you file electronically, you cannot add written explanations of any deductions the IRS might question (see Tip #5). No one can say for sure whether filing a paper return lessens your chance of an audit, but why make life easier for the IRS if you don’t have to?

Tip #5: Explain Items the IRS Will Question

If your return contains an item that the IRS may question or that could increase the likelihood of an audit, include an explanation and documentation to prove everything is on the up and up. For example, if your return contains a substantial casualty loss deduction, explain the circumstances. This won’t necessarily avoid an audit, but it may reduce your chances. Here’s why: If the IRS computer determines that your return is a good candidate for an audit, an IRS classifier screens it to see whether it really warrants an audit. If your explanation looks reasonable, the screener may decide you shouldn’t be audited after all.

Tip #6: Report All Your Rental Income

You should always report all the income you receive. The IRS has a pretty good idea how much money rental properties ordinarily bring in. If the income you list on your Schedule E looks disproportionately low for the size, location, or value of your rental property, your return may be tagged for an audit.