Tips for Avoiding an Audit

The IRS has two broad categories of audits: correspondent audits, which are typically simple queries handled by mail, and face-to-face audits, conducted in an IRS office or at the taxpayer’s home or business.

Tax experts say individuals can reduce the chances of being contacted for a correspondent audit relatively easily, simply by avoiding common paperwork errors, such as not signing a return, adding or subtracting numbers incorrectly, using incorrect Social Security numbers or not including all W-2 forms. Keeping informed about changes in the tax law can also help. For example, this year the IRS says it has seen tax returns reflecting Roth IRA conversions by people who were ineligible to make them because their adjusted gross incomes exceeded the $100,000 cutoff.

Reducing the chance of a face-to-face audit is harder. Most audits are triggered by an IRS formula that scores returns based on national averages for incomes and deductions, but the details of what affects a taxpayer’s score is a closely guarded IRS secret.

Typically, taxpayers with incomes more than $100,000 and those who report self-employment income on Schedule C are more susceptible to audits. Tax preparers say unusually large deductions can often trigger audits; letters of explanation attached to the return may help avoid further inquiry.

Taxpayers can improve their chances of prevailing in an audit by keeping good and thorough records. Deductions should be carefully documented and sources of income meticulously recorded. A gift of cash from a relative, for example, should be accompanied by a letter making it clear who made the gift and why.

Ignoring IRS notices or failing to file a return when required is almost certain to prompt an audit, tax preparers say. If a taxpayer is unable to pay, tax preparers recommend filing a return or extension and contacting the IRS about a payment plan.