Best Advice on How to Avoid an IRS Audit

Only about one percent of tax returns get audited each year. Still, the IRS states that audits are on the rise. While it may be impossible to completely rid yourself of the risk of being audited by the IRS, it is fairly easy to reduce that risk. Here is the best advice offered by tax experts on how to avoid an IRS audit.

In order to reduce the risk of an IRS audit, you should avoid throwing up what the IRS considers to be red flags. These red flags put you on the IRS's radar and increase your chances of being audited.

Home-office deductions are one example of a red flag. The tax laws allow self-employed individuals who use part of their home as an office to deduct some of their income expenses, including a portion of their utility bills, insurance, and repair costs. Individuals who work from home for other employers may also use these deductions. However, if their employers provide them with office space, they are no longer eligible. Therefore, these deductions are carefully scrutinized by the IRS, especially if the individual claiming home-office deductions is employed by someone other than himself.

Business losses can be another red flag for the IRS. If an individual starts a sideline business, such as a freelance writing business, for the purpose of generating tax deductions, the IRS can very quickly get wise. That business must be profitable in at least three of the past five years in order to be considered a legitimate business for tax purposes. Otherwise, it will merely be considered a hobby, and the individual will only be able to deduct losses up to the amount of the income that hobby has brought in.

The IRS has recently become more strict with respect to noncash charitable donations as well. Individuals may no longer claim a deduction for used clothing or other household items, including furniture and appliances, that are not in "good" condition or better. As such, the IRS will more strictly scrutinize tax returns claiming these types of noncash charitable donations.