Learn How You Can Avoid an IRS Audit

January 14, 2008 2:12:55 PM PST
What can you do to avoid an audit? First and foremost, obviously, you need to be honest. However, there are some things that you can do that will help your cause.

Prepare your tax return by computer: Computer-prepared returns look neater and more official to the IRS, and lessen the chance of an audit. Programs such as Intuit's TurboTax and MacInTax can help you prepare your return.

Do not use round numbers for deductions: Do not round off your deductions to make the numbers look neater. Round numbers make the IRS think that you are estimating things; you want to prove that you are keeping precise and accurate records.

Limit itemized deductions: Although it is OK to itemize deductions, be careful about making large deductions that may seem irregular given your income bracket. And it is critically important to keep records of all your donations, so that you have proof if the IRS comes knocking.

If you claim large deductions, provide proof: For large deductions, such as medical bills or expenses from flood damages, attach receipts, checks, insurance reports and anything else you have to prove their legitimacy.

Ask for help if you need it: Tax professionals prepare all year for this season, so do not be afraid to ask for their advice. They can tell you what you are missing before the IRS does.

Check your math: The IRS automatically corrects some mathematical errors, but that does not mean a return full of math errors will not be red-flagged. If you are filing paper returns, check your math carefully to avoid careless errors that could cost you later. Or if your math skills are lacking use software and or e-file.

Prepare, but do not file early: Although it is a good idea to have your return completed early, the same cannot be said for filing early. By filing and paying your tax bill early, you are essentially loaning the IRS money that you might be able to otherwise grow. So, while you do not want to be scrambling at the post office on April 15, avoid sending your money in too early.

Report cash prizes and alimony: Learn a lesson from Richard Hatch, the first winner on the television program "Survivor" -- if you win a cash prize, be sure you understand all the tax implications and record it as income, if appropriate. Likewise, alimony is also considered income, so be sure to report it as the IRS now matches deductions for alimony from one spouse with the alimony income from the other spouse.

Do not forget your John Hancock: Neglecting to provide your signature is a frequent mistake among paper filers. In fact, more than 1 million letters are mailed to individuals who neglect to sign their returns each year. Keep in mind, if you did not sign your return, you did not file it. If you are filing jointly, your return must have both signatures. Think of this like endorsing a check -- without the signature, your deposit is not valid.

Keep records: The IRS has up to three years to audit your return. Therefore, it is important to keep you tax records for at least that long. In addition, the IRS has six years to come after you if they believe you under-reported your gross income by more than 25 percent, so keeping your records organized is essential.

Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is ABC News' personal finance expert. Matthew Yale and Aimee Z. Daley contributed to this report.