What are the best practices for ‘small fish’ (like me) to avoid an IRS audit? Or to put another way - what not to do that might increase chances of getting an audit?
Renounce your citizenship and move to another country. 
As long as the statistics of your return are in the normal range for other taxpayers of similar incomes, your chances of being audited are greatly diminished.
If you are itemizing deductions and your interest deduction, charitable contributions, medical expenses, non-reimbursed work expenses, etc. as a % of your adjusted gross income are significantly out of whack from other people with similar income levels, then your chance of being audited go up significantly.
It’s simple. Report all of your income, particularly anything that is also being sent to the IRS, and don’t exaggerate your deductions. The IRS really isn’t looking for someone like you unless you do something that clearly raises a red flag. If your return falls within the bounds of ‘normal’, which it should, the chances of being audited are actually pretty low.
Not lying on your tax forms is a great start … just how small of a fish are we talking about here … is all your income from a W-4, then the numbers will match and there’s a very small chance of getting audited (but not zero odds) … are you a small business owner and your depreciation deduction jumped 500% this year, better have saved your receipts …
I’ve never been audited … but a friend of mine was and he relates the tale that the auditor was only interested in the “big ticket” items … tractors, houses, business trips to Fiji, involuntary conversions … the auditor didn’t ask about the 25¢ in bolts …
ETA: Be very careful about listed property …
For at least one friend of mine the audit trigger was him reporting a short sale of stock. The auditor didn’t understand how he could possible sell stock before he purchased it.
They ended up having to sit down with they auditor’s manager while they both explained to the auditor how short sales worked.
How big are the non-automatic deductions you’re taking? If you’re just doing a 1040-EZ, or a regular 1040 with some well-documented deductions (like mortgage interest) then there’s no point in an audit. If you’re trying to take a lot of deductions that may be questionable (like claiming things as a business expense) or stuff that takes significant accounting, then you’re more likely to get audited, especially if they’re not typical for your income level, they may look into it. Also I’ve heard that round numbers that shouldn’t be round are a big tip-off - declaring $4683.76 cents of travel expenses is less likely to draw attention than declaring $4500.00 or $5000.00 since it looks like you actually added amounts together.
$4683 versus $4500, perhaps. But the cents make no difference since they’re not reported. The IRS rounds income and deductions/credits to the nearest dollar.
I’ve heard that a steady record is less likely to trigger an audit. If you submit essentially the same return year after year it just goes through the system. But if you submit a return that varies significantly - something like a doubling in income - it can get noticed and audited.
My understanding, gleaned from an irs agent I knew many years ago (the info may be dated) is that there are basically two kinds of audit to which an ordinary person might be subject.
The first is a random audit. In this audit you will be asked to justify all your deductions. This kind of audit is used for information gathering purposes. The IRS wants statistical information to guide it on when to require the second type of audit. (It is, however, a real audit and you will owe penalties and interest for any unpaid taxes). There is nothing you can do to avoid this type of audit.
In the second type of audit you are selected based on the specific criteria of your return. Let’s say that the IRS has information (gotten from the random audits) that the “home office” provisions are often abused. You have large deductions from your home office. You might be selected for an audit.
If you use software to prepare your return, it will likely alert you to these situations and you could tailor your return to make an audit less likely.
Don’t claim the adoption tax credit. In 2012, the IRS audited 70% of all returns claiming the credit, compared to about 1% of returns in general. The whole thing was ridiculous and a waste of time and money, since, out of just over $668 million claimed for the credit, the IRS disallowed about $11 million, or 1.6%. I’m sure that was well worth the time and hassle they put around 35,000 families through.
(note: they haven’t done this again recently, but I’d still be hesitant.)
That’s not how audits work. The auditor does not select the return. The computer does, then a team of senior auditors goes over them to decide what issues really are audit worthy, culling about half.
Then it is assigned to a group, then a auditor.
So, it is categorically impossible that the “audit trigger” was caused by “The auditor didn’t understand how he could possible sell stock before he purchased it.”.
Office in the Home is a audit trigger. So is a loss on a Schedule C with small income.
Car donations used to be. Large casualty losses.
Dependents in Mexico are a issue.
If you only have W-2 income and only take standard deductions then pretty much the only way you will ever be audited is if you are one of the randomly selected callibration audits that Ethelbert mentioned.
Exactly. They aren’t picking over the details of the ‘small fish’. Random audits shouldn’t be bad for the ‘small fish’ either, there’s isn’t much to hide. Just don’t ignore income on the belief they’ll never find out about it or deduct significant sums that are hazy. They’re unlikely to use a microscope on deductions within a range common for your income. Tax cheats and people or businesses with high income and complicated returns have to fear an audit, for the regular guy it’s just an annoyance. If you do get audited hire a good tax accountant to help you out, they’ll know how to answer any questions. A guy I worked for way back got randomly audited, his income was easily over $500,000, when they were done he got money back!
I remember reading about this in Canada, so not sure if they would do the same in USA; they would target a particular occupation/location. For example - “We are going to audit all the waiters in Vernon, BC to see if they are declaring all their tips.”
Which brings up another category prone to audits - people who receive random money like tips, or do lots of small jobs, like house repair contractors. It would be a lot easier to not declare some of that income and difficult to track it. IIRC for tips, declaring a basic amount is a lot less likely to raise suspicion than declaring nothing; and the revenue department has a good idea what a reasonable amount should be. For contractors, especially being paid in cash makes it easier to hide income, particularly since they have to collect GST (sales tax) too. I had a fellow do a bit of work many moons ago and we agreed we did not see a need to contribute to Prim Minister Jean Chretien’s pension. I got a discount too.
We were subjected to this travesty in 2012 and again in 2014. My theory is that they chose adoptive families because we are used to dealing with mountains of paperwork.
In 2012 we were “audited by mail”, an especially hellish version of auditing as it involves months of mailing documents back and forth and you’d better be damn sure you don’t misplace a letter from the IRS. They eventually concluded that we owed them 37 cents.
They were slightly more successful in 2014. Initially claiming that we owed over $12,000 in additional taxes, they ended up deciding that the actual amount was $114.
Odd, since audit amounts are always rounded to the nearest dollar.
What if you don’t itemize? I’ve always assumed that because I never itemize, I would be very unlikely to be audited. But I can’t find anything online specifically saying this. Most sites just talk about the types of deductions that increase your audit risk.
Does anyone know how likely you are to be audited if you never itemize?
The letter stated something like “If the amount listed above is less than 1 dollar, you do not need to pay”.
I sent them a check anyway.