Avoiding Tax Audits

There are two pieces of advice that you should keep in mind about audits:

• If you've done your homework, kept good records, and your return is truthful, you don't have anything to worry about.
• It's better not to be audited.

First, let's talk about the second point.

The average taxpayer has a very small chance of being audited. But if you are self-employed, your return is definitely not typical of the millions of returns filed by employees. You may be waving some red flags at the IRS and increasing your chances of being audited.

The IRS does not provide details on its audit criteria - in fact, they are a closely guarded secret. However, we offer the following suggestions for minimizing your risk:

• Make sure that the information provided on any W-2 forms you receive from employers, and 1099s or 1098s you receive as an independent contractor or from banks, mutual funds, brokerages, retirement plans, or any other source, are accurately reflected on your return. If there is a mistake, get the issuer of the form to correct it. The IRS computer matches these figures with the figures on your return, and it will question any mismatch. If you have many of these forms, report each one separately somewhere on your tax return, or on a separate schedule that you attach to the return. The computer will not catch it if you lump the numbers together.
• If you are claiming an unusual deduction or there is something confusing on your return, attach a written explanation. Any statements should be as brief and to the point as possible - don't ramble or provide unessential details.
• If you are claiming home office expenses or significant travel or entertainment expenses, make sure you have the records. The IRS scrutinizes these expenses very carefully. The same is true of all business expenses if you haven't yet established a track record, and especially if your business is not profitable.
• Sign your return. Fill out all the information required. For example, it's common to omit the Social Security number of an ex-spouse from a return, but you are required to supply it if you are paying alimony. Make sure your return is complete.
• Make sure your math is correct. Arithmetic errors are the most common errors turned up by the IRS. If you are doing your own return with a calculator, after you've done all the computations, we suggest you start at the amount of your refund (or tax you owe) and work backwards to check your work (e.g., add back your payments, subtract your other taxes, and add back your credits to see whether you arrive at the same tax amount; continue in this vein for the rest of the return).
• Make sure that all Social Security numbers for your dependents are correct.