How Can I Avoid an IRS Audit?

By Markets Fool.com

Though getting audited by the IRS usually isn't as traumatic an experience as some might expect, most of us would obviously prefer to stay off the audit list in the first place. And there's good news in that regard: Less than 1% of the population actually gets audited, which means your chances are pretty low to begin with.

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That said, there are certain steps you can take to avoid an IRS audit and the headache that could come with it.

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Report all of your income
It's not enough to report the money you earned from your full-time job and call it a day. You need to report any and all sources of income to the IRS if you want to avoid an audit. This means that if you performed freelance work on the side, you'll need to tell the IRS how much you made. It also means that you'll need to report any money you earned from your investments, including stock dividends, bond interest payments, and interest payments from your bank. If you have income coming in from a variety of sources, you'll need to look out for your 1099 forms in the mail (or in your email, if you're signed up to receive them electronically). These forms contain the same information that the issuing entities report to the IRS -- and it's imperative that your tax return match what the IRS is seeing if you want to stay off that audit list.

Keep impeccable records
Eligible for some tax deductions? Make sure you have the documentation to support them, as deductions that smell fishy can trigger an IRS audit. So what does the IRS consider "fishy"? Figures that are too high or too perfectly rounded might raise a red flag. (Do you really have exactly $500 to write off as mileage and exactly $500 to write off for business dinners?) If you use your car for business purposes, be sure to consistently log your miles so you can report the most accurate figure when the time comes to do your taxes. Similarly, retain all credit card statements, bills, and receipts for things like office equipment, electricity, and Internet service -- expenses that can be written off against freelance income, provided they're accurate and well-documented.

Don't be overly charitable
Or at least don't pretendto be. If you've donated a large percentage of your income and you have the records to prove it, then by all means, claim your deductions. But if you're claiming you donated a huge portion of your income, then you'd better be prepared to show proof of your donations.

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Think about it: Does it make sense for someone making $30,000 a year to donate $10,000 to charity? Not really. On the other hand, it's far more feasible for someone at that income level to give away $1,000 over the course of a year. Remember, too, that if you donate goods (like old clothing and toys) as opposed to cash, then you'll need to file Form 8283 if the combined value of what you give away is more than $500. Failing to do so could also get you an unwanted spot on that list.

File your taxes electronically
Besides helping you save money on stamps and a trip to the post office, filing electronically has another major benefit: It can lower your chances of making a mistake and winding up on the audit list as a result. According to the IRS, the error rate for paper tax returns is 21%. By contrast, only 0.5% of electronically filed returns contain errors, and if yours is free of glaring mistakes, you're less likely to find an audit notice in the mail.

Of course, sometimes even the most honest, diligent people somehow wind up getting audited, so if you're one of them this year, don't panic. Often, all you need to do is submit additional documentation to the IRS in support of your tax return, and if you were keeping good records in the first place, that should be a piece of cake. Besides, there's always the chance that an audit will work out in your favor. In 2014, the IRS issued refunds to over 38,000 filers who initially overpaid their taxes. It just goes to show that an audit notice doesn't have to spell disaster, especially for those who play by the rules.

The article How Can I Avoid an IRS Audit? originally appeared on Fool.com.

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