How to Prepare for an Audit of Your Income Tax Return

Preparing for an audit.

You don't need to panic if your tax return is selected for audit. In most cases it simply means that your return was randomly selected, or that your return was flagged because it had one or more items that require a closer look. Here are the most common reasons returns are flagged.

If you are self-employed, your chances of being audited increase.

If your income is much higher or lower than the previous year, someone will probably want to know why.

If you are trying to deduct expenses for a home office, or you are involved in a partnership, your return is more likely to be flagged.

If your income is mainly from tips or rentals, or if you have lots of money tied up in tax shelters, the government may be interested in learning more details about it.

If your return shows a high percentage of deductions for the amount of income reported, you may be audited and required to provide further explanations and proof.

If you have large money transfers that are not adequately explained on your return, you can almost surely expect your return to be flagged.

If someone reports paying you a large sum that does not show up as income on your own return; or if someone simply turns you in for a tax violation, chances are high that you will be audited.

If your annual income is over $100,000, or if you have had prior audits, your chances of being audited increase greatly.

It is impossible to avoid an audit if you are flagged for one, but you can reduce your chances of having one by making your return as complete and accurate as possible in the first place.

If, after you have done your best to be complete and accurate, you still receive a notice that you must appear for an audit, try not to take it personally. Auditors are not out to, "get you," only to recheck your return in your presence to be sure it is correct. If an error is discovered, on either side, ample opportunity is given to rectify the error so you are still not in danger of prison or any other dire consequence unless blatant fraud of some kind is present. In that case, prison may be a just reward.