"Getting audited isn’t fun! However, there are some steps that can significantly reduce your audit risk:
1. File electronically or mail your return using registered mail or Federal Express (Fedex): If the regional service center fails to receive your return, your chances of being audited go up automatically. To make sure that this doesn’t happen, file electronically. This also will automatically ensure that you have the correct social security number and didn’t transcribe digits. The next best option is to use some form of shipping tracking such as Federal Express.
2. If you move, send a change of address to the IRS using Form 8822. As reported by USA Today, IRS wants to give over $78 million in refunds, but they can’t find the people! Maybe I’m crazy, but if the situation was reversed and IRS wanted money from you, don’t you think they would find you? Moreover, if IRS sends you notices, they only need to send it to the last known address.
3. Make your return is neat and readable. If you don’t type your return, please, please, please have someone with good handwriting fill out the form. If they can’t read it, they might think it’s “suspicious.” (NOTE: More reason to eFile with Genesis Tax Services)
4. File all elections that you’re entitled to. For example, if you file your return late, use an extension. Moreover, there are certain tax break options that require the filing of an election such as electing to expense equipment instead of depreciating equipment.
5. Report all of your income! This is a biggie! IRS has implemented procedures to track all of the information forms ( FORM 1099s and W-2s) to your tax return. Your tax return should at least match all of these figures. This is particularly true if you are incorporated. Make sure that the income reported by you and by your corporation match what has been reported. Many people report the income on the wrong entity. If there is an error on the 1099 that was reported incorrectly, notify the sender to get a corrected 1099. If one wasn’t received, attach a statement to both your corporate return and individual return about this error showing reconciliation.
6. Break large expenses into small segments with an attached statement. If you have any large ticket items, attach a statement explaining the item and breaking it down. For example, I know someone who had $25,000 in dental expenses and got audited as a result. If he attached a statement that this involved orthodontia for his three kids and perio surgery for he and his wife, it would have seemed more reasonable. He might have avoided the audit altogether!
7. Keep records of expert advice: If you relied on the advice of an accountant or lawyer, keep records as to the nature and date of the advice. There are cases in which penalties have been waived for a good faith reliance on in independent expert."
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