There are lots of things that scare many people: snakes, public speaking, needles, trips to the dentist... and the thought of having your tax return audited by the Internal Revenue Service (IRS). When it comes to tax audits, there's good news and even better news: The odds of getting audited are quite low -- and you can make your odds of being audited even lower.
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Here's a look at your likelihood of getting audited and seven ways to avoid a tax audit.
An IRS tax audit: The odds are very low
How often do people get audited? Here's some information from the horse's mouth: According to the 2016 IRS data book, there were about 148 million individual tax returns filed in 2015. Of those, a sizable 1.2 million ended up "examined" -- i.e. audited. In other words, less than 1% -- a mere 0.8% -- of the returns were audited.
Your odds are likely to get even better without your ever doing anything, too. That's because Congress has been cutting the IRS's budget repeatedly over many years. IRS Commissioner John Koskinen noted that the agency has had its headcount reduced by more than 5,000 people since 2010, noting that those are the people "who audit returns and perform collection activities, as well as... investigate stolen identity refund fraud and other tax-related crimes." He added:
As you might imagine, these staffing losses have translated into a steady decline in the number of individual audits over the past six years. Last year, in fact, we completed the fewest audits in a decade.... That trend line of fewer audits will continue this year.
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Don't be too quick to applaud IRS budget cuts, though, because the agency generates far more money than it uses, so fewer audits mean fewer dollars collected that were due to the government. Koskinen observed that, "... historical collection results suggest that the government is forgoing more than $5 billion a year in enforcement revenue, just to achieve budget savings of a few hundred million dollars."
An IRS tax audit: You can make your odds of being audited even lower
If having a less than 1% chance of being audited is still worrying you, you can reduce the probability even further in several ways:
1. Don't fail to file a return
You may think that if you had no income during the tax year, or if you owe no taxes, you don't have to file a return. That's wrong, though, because if you don't file a tax return for any reason, the IRS may contact and question you. If you have no income or no taxes due, you should still file a return, explaining that you have no income and/or demonstrating that you have no taxes due.
2. Don't use a problematic tax preparer
Next, don't assume that most tax preparers will do a good job for you. If your preparer makes mistakes, you could end up audited. Of course, even professional tax preparers can make mistakes, and some preparers may run afoul of the law while trying to lower your taxes, while others might even be stealing from you. Don't let that scare you away from using a qualified tax pro, though, as good ones will know much more about the tax code than you do, and can save you much more than they'll charge you. Just remember that ultimately, you're the one responsible for your tax return.
Find a recommended pro -- perhaps an "Enrolled Agent," a tax pro licensed by the IRS who's authorized to represent you before the IRS, if need be. You might find one through the website of the National Association of Enrolled Agents. Tax-prep software is also a good option for many people, especially if your financial life isn't too complex.
3. Don't be messy or illegible, and don't make mistakes
Your grade-school teachers were right when they told you that writing neatly and clearly is important. The IRS needs to be able to make sense of your tax return, and if it can't tell whether that's a 0 or a 6, or your return is just too hard to read, it will draw attention and could end up audited. To avoid being audited, you want to avoid having any attention drawn to your return. You want it to be one of the 147 million that smoothly get processed without question.
You want your tax return to not only be neat, but also error free. Preparing a tax return on your own can be confusing and it's easy to get something wrong, whether you reverse two numbers, or put a number in the wrong box. Double-check your math, and be sure that any numbers you're entering in your return are correct. It can be very helpful to use tax-preparation software and to electronically file your return, as such returns tend to be more accurate than hand-prepared ones. Remember to sign your return, too: Unsigned returns will also draw the attention of the IRS.
4. Don't report a zero income
If you have no income and file a tax return that says so, you're doing the right thing -- but your odds of getting audited will still be higher than those folks who report income. Why? Well, as an example, if you're self-employed and post a net loss for the year, the IRS might want to double-check to make sure you're not pulling a fast one. In 2016, about 3.25% of returns with no adjusted gross income were audited.
5. Don't look suspicious
The IRS will often flag tax returns that look suspicious for one reason or another. It knows, for example, what range of charitable contributions to expect on returns of taxpayers with various levels of income. If you report a much higher figure for your contributions, the IRS might want a closer look. Similarly, if you claim outsized home-office expenses, the IRS might question you.
Another kind of suspicious number is a very round one, like $500 or $2,500. If your gain on a sale of stock was $3,000 even, for example, the IRS might want to see a trade confirmation, to verify that. Some round numbers just naturally occur, but be aware that they can draw attention.
6. Don't omit information
Another red flag for the IRS is if you fail to report any income, or omit any other information. Even if it's just a tiny dividend payment you don't want to bother mentioning, it needs to be included -- not only because it's the right thing to do, but also because the IRS probably already knows about it and will wonder why you haven't mentioned it. Entities that pay you -- whether it's salary payments, dividend income, interest paid, or something else -- generally report these payments to the IRS. The IRS then expects your return to include all of these payments.
7. Don't be dishonest
If you're stretching the truth on your tax return -- especially if you're self-employed -- you may catch the attention of auditors. Be ready to substantiate any claims (business meals, business-related miles driven, business entertainment costs, etc.) with receipts, or other documentation. If you're claiming a home-office deduction, you should actually have a home office, and one that conforms to the rules, such as being used solely for your business. (Considering your family den as your home office because you have a desk in a corner and work there while your kids watch TV doesn't pass muster.)
Surprise! Audits are usually not so bad
The seven tips above will help you improve your odds of not being audited -- but they can't shrink your odds to zero. You may still just honestly have some features on your return that raise questions at the IRS, or just increase the odds of an audit -- such as having a high income, or significant deductions. Also, some returns may be audited at random.
Despite your best efforts, if you still find yourself facing an audit, don't start hyperventilating. Audits tend to be relatively minor events. About 70% or more of audits are conducted through the mail, not by requiring you to sit across a desk from an IRS agent. And many of them result in additional money coming your way, too. Audits can seem scary, but they're not usually a problem if you've been honest.
Don't lose too much sleep over your chance of getting audited. You can reduce your odds of it happening, but even if it does occur, it probably won't be too traumatic.
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