You’ve collected your receipts and statements, you’ve received your W-2 forms from your employer and have met with your professional tax preparer. You’ve even sent the tax return in with the click of a mouse, well in advance of the deadline. For the first time in a while, you’re done early. Well…not so fast. Seems you’ve triggered an audit, and have entered the zone no one wants to visit. With careful planning and honest reporting, you’ll never be a blip on the radar. Here are 5 ways to avoid a tax audit.
1. Check your entries – Some people are so eager to get the process done and over with, they hastily add up the items in front of them and neglect to include all of the income reports, investment statements and other financial paperwork before signing off. This waves a red flag that can lead to that dreaded letter. So hesitate – is worth the wait.
2. Be honest – There’s a temptation to fudge the numbers to avoid moving into another bracket, or take larger deductions, but if you think of your tax form as a stand-alone document, you’re forgetting all the other entities that will report their relationships with you, and your errors or omissions could trigger an audit.
3. Correct reporting – It might be tempting to list a niece as a dependent because you helped pay tuition, but listing her as a dependent would be a big mistake. Carefully read the guidelines about what is allowed, or have a professional do your taxes and answer the questions honestly. Your support documents will tell the complete story.
4. Realistic deduction – Studies show the pool of earners who are watched closely tend to be those who earn less than $200,000, on one end and more than $1 million on the other. Those in the brackets that are most likely to be audited tend to earn over $1 million. Some would say those at the bottom of the earning pile are scrutinized most for fraud.
5. Keep your receipts – It does no good to shop online with Groupons and get fabulous deals from stores like Ugg which discount their shoes and boots by as much as 40% if you don’t keep all records of your sales transactions. Don’t be so eager to take advantage of their great savings on shoes and accessories for the whole family that you forget to enter them in your spreadsheet.