Prevent an IRS Audit, 10 Strategies

By Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein, Rogoff, Olsen & Co., LLP

Do you want an IRS agent to make a visit to your office? I don’t know many people who do, but knowing strategies to prevent an unwanted visit could certainly save you from an extra bit of stress in life. Only one percent of taxpayers yearly are selected for IRS audits, but that number is increasing. Help prevent or avoid an IRS audit by employing the below 10 strategies. Please note the following definition, the term "prevent or avoid an IRS Audit", is used here to mean prevent or avoid being selected by the IRS to be audited.

1. Avoid Fluctuations In Income

The IRS has a pretty good idea how much you live on; if they notice a drastic change in your income, they will most likely suspect that something was not reported. So, to help prevent or avoid an IRS Audit, avoid fluctuations in income.

2. Report All Income

The IRS has access to quite a bit of information; it is probably not the best idea to omit reporting some income. If they discover unreported interest, dividends or miscellaneous income, you may not be heading down the nicest path. Keep in mind that the IRS receives the same 1099s that you are receiving too. So, to help prevent or avoid an IRS Audit, report all income.

3. Abnormally Low Income

If your income is substantially lower than other individuals in your profession, the IRS may become suspicious. So, to help prevent or avoid an IRS Audit, do not report income lower than received.

4. High Income

If you have an income over $100,000, you may want to be extra cautious. IRS audits are five times more likely to occur if you are in this income bracket.

5. Don’t Round Numbers

Good record keeping will draw less attention from the IRS. When numbers are rounded the IRS will suspect that errors could have occurred. For instance, reporting $1,978 dollars on meal expenses rather than $3,000 demonstrates that you are organized and precise. So, to help prevent or avoid an IRS Audit, don't round numbers.

6. Watch Your Number of Charitable Contributions

Charity is important, but be aware that a red flag may arise if you have made a lot of contributions. Make sure to hold onto your receipts, particularly, if you are donating five times as much as the average person in your income bracket. So, to prevent or avoid an IRS Audit, watch your number of charitable contributions.

7. File a Complete and Organized Return

When the prepared return is sloppy or missing information, the IRS will be more likely to target you. With technology today, returns are checked by a computer, but if a computer can’t read the return, then an IRS agent will have to. This is where filing electronically comes in quite nicely. So, to help prevent or avoid an IRS Audit, file a complete and organized return.

8. Be Careful with Deductions

The IRS knows the average percent of deductions for your income bracket. You are entitled to the deductions that you have, but if they are more than the averages, you may draw the attention of the IRS. So, to help prevent or avoid an IRS Audit, be careful with deductions.

9. Consistent Information on State and Federal Returns

If you are giving the IRS different information on the returns that you are submitting, they may suspect that you are trying to hide something from them. So, to help prevent or avoid an IRS Audit, report consistent information on State and Federal returns.

10. Do not Participate in Tax Scams

You should avoid participating in these transactions as they will only raise more red flags in your direction. So, to help prevent or avoid an IRS Audit, do not participate in tax scams.

    However, the best way to prevent or avoid an IRS audit is to use a professional firm with experience preparing complicated tax returns for high net-worth individuals. Greenstein Rogoff Olsen & Co. LLP, located in the San Francisco Bay Area, is such a certified public accounting firm. It is also a trusted advisor to many of Silicon Valley's most successful entrepreneurs and Venture Capitalists. See www.GROCO.com for more information.