Personal Finance > Taxes

5 ways to avoid an audit
Don't invite IRS scrutiny. Make sure your return is neat, complete and self-explanatory.
April 9, 2004: 3:03 PM EDT
By Sarah Max, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Worried Uncle Sam will put his reading glasses on and take a second look at your tax return this year?

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Overall, your chances of getting audited are very small. In 2001 and 2002, only 1 in 174 tax filers were audited, according to IRS data analyzed by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University. That's a mere 0.57 percent of all filers.

In 2003, the IRS reported Thursday, audit rates increased slightly: 1 in 154 filers got hit.

But your chances can vary greatly by region and tax bracket. For example, high-income taxpayers in the Los Angeles area were eight times more likely to be audited than those in Georgia in 2000, according to TRAC. (In 2001, the IRS stopped disclosing regional audit rates.)

What's more, you may increase your chances of being audited inadvertently by sending any number of red flags to the IRS.

The formula the IRS uses to determine who gets audited is a closely guarded secret. "It's like the chemical composition of Coca-Cola," said Fred Daily, a tax attorney and author of the book "Stand Up to the IRS."

What is known is that your tax return gets a computer-generated score. "They're grading for audit potential, and the more your return deviates from the norm, the higher your score," Daily said.

For example, if the average person in your income bracket claims $500 in charitable donations, but you claim $5,000 in donations, you're likely to score high, and that's not a good thing.

About 10 percent of the highest scoring returns are examined by IRS employees who determine whether they warrant an audit. "Your job is to stay out of that 10 percent," Daily said.

Here are five straightforward things you can do to accomplish that mission.

Step 1: Keep it neat

Appearance matters. "One of the worst things you can do is turn in a handwritten return," Daily said. "You want your return to at least look like it's been done by someone who's paying attention to detail."

Your return will have that put-together look if you hire a tax professional or if you prepare your own return using a computer and a tax software program. By using a program, you're also less likely to make a math error, which is the No. 1 problem the IRS finds when checking returns.

Step 2: Report all income and gains

One of the most important things you can do to avoid an audit is to make sure you report on your return the relevant information from every W-2 and 1099 form you receive.

"The IRS receives [copies of] those automatically [from your employer and brokerage firm], so if your return doesn't include them you could provoke an audit," said Jeffrey Kelson, a tax partner in the New York office of BDO Seidman.

Also, don't overlook other kinds of income or capital gains, like those derived from gambling winnings, jury duty, or the sale of a security or piece of property.

"I once cashed out a bunch of savings bonds in the middle of the year and forgot about them," said Jackie Perlman, a senior tax research analyst for H&R Block. "Then I got a nice little love note from the IRS saying they'd corrected my return."

Step 3: Claim business expenses with care

Business expenses and home-office deductions, in particular, can invite scrutiny.

"I'm not saying you shouldn't claim deductions," Kelson said. "Just make sure they are legitimate and you have the documents to back them up."

The IRS also keeps its eye out for absurd tax claims and commonly held deduction myths.

"You'd be amazed at the kind of things people come in and think they can deduct," Perlman said. "If you're not sure about a deduction, talk to someone who knows the law, not your Uncle Louie."

Step 4: Explain and document unusual items

While the IRS looks to see how you compare with taxpayers like you, an audit is not imminent if you don't stack up.

You do, however, need to do a good job of explaining yourself if you have some unusual items on your return.

For example, if you want to claim a large casualty loss because your house was wiped out by a hurricane, it's not a bad idea to attach at the end of your return a bill for the damage and a newspaper article on the event, Daily said.

If your company doesn't reimburse you for a lot of work-related expenses, you may be able to deduct them. "But don't just slap $10,000 of miscellaneous expenses on your return," Perlman said. "You need to explain that you work for company XYZ and do not get reimbursed for XYZ expenses."

While you don't need to include all receipts with your return, have the receipts to back up these deductions if Uncle Sam comes knocking.

"The bottom line is, think like an IRS auditor," Perlman added. "You don't want them to pick up your return and say, 'What the heck is that?'"

Step 5: Check your return

Once you've finished your return, check your math, your Social Security number and other details. And don't forget to sign it.

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While these errors won't necessarily lead to an audit, they may give the IRS no choice but to send your return back for corrections.

"Remember, you don't want to have any more correspondence with the IRS than is necessary," Kelson said.

(In the event you're one of the unlucky few, click here for tips on surviving an audit, which may not be nearly as bad as you think.)

Editor's note: This is an updated version of an article that originally ran in 2003.  Top of page

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