The Top Five Ways to Avoid a Tax Audit

1. Check your figures.

One of the most common red flags for auditors — erroneous data entry — is also one of the most preventable. It seems simple enough to follow the advice to double-check your return. But people often are too careless regarding their taxes, said Thomas Jensen, managing partner at Vaerdi Financial in Portland, Ore.

Jensen advised waiting for all of your income reports, bank and investment statements and other applicable financial paperwork to arrive before starting your tax return.

“Sometimes, people simply forget (income), or they don’t get all of their forms gathered, and they make mistakes that are avoidable,” he said.

Correctly reporting dependents and exemptions, and ensuring that the numbers match, is important because the IRS's automated system will easily detect discrepancies, Jensen said. "And they don’t know if that is a mistake or purposeful,” he added.

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2. Honesty is the best policy.

Being 100 percent truthful on your tax return is an absolute must to reduce the chances of an audit. Realistically reporting income, deductions, credits and other figures can help keep the tax man at bay, Jensen said.

Not reporting all of your income is a surefire way to attract attention, said Tim Clegg, a Boston-based financial coach and retired tax advocate.

“Outright lying, especially if you earn a six-figure income or are hiding large sums of cash, is definitely a behavior that will get you audited,” he said.

You should be prepared to look an auditor in the eye and support any number you claimed on your return, Clegg said. Self-employed filers, for example, should have receipts for every business deduction they claim.

3. Go vanilla.

The largest pool of filers — which consists of individuals or joint filers who earned less than $200,000 but more than the lowest earners — tends to avoid overt scrutiny, Jensen said. Taxpayers who make more than $1 million a year and those in very low income brackets are the most likely to be audited.

“The wealthy take more deductions, contribute to more charities and other things, so they have a higher risk of getting audited,” Jensen said. “Also, any filer who files a Schedule C is about four times more likely to receive questions.”

Those who are in what the IRS determines to be a low-income bracket — for example, a married couple who earned $50,270 or less in 2011 and had three children — have access to the Earned Income Tax Credit.

Both categories are historically fertile grounds for mistakes in data entry (because of the greater complexity) and for fraud. If you file Form 1040EZ, pay rent, don’t have children and make a modest income, there’s virtually no chance that you’ll be audited “unless you make some sort of mistake with your numbers” or your “costs are out of the norm,” Jensen said.

“For example, giving away more than 30 percent of your income to charity is something most people don’t do,” he said. “That could draw attention.”

4. Claim realistic deductions.

Unusual or unrealistic itemized deductions, either for individuals or small-business owners, may raise a red flag for auditors.

For a sole proprietor who files Schedule C, which details profits and business expenses, reporting losses for three or more years could encourage an auditor to request proof that the filer is actually in business, Jensen said.

Filers who itemize deductions on Schedule A must know what constitutes a legitimate deduction, said Sandy Zinman, the founder of Zinman Accounting and the chairman of the tax committee for the National Conference of CPA Practitioners. Daily commuting to your regular job, for example, is not a legitimate deduction, he said, but a special trip to woo a client is.

"There are a lot of assumptions out there about what should be deductible or not," Zinman said. "An IRS examiner once said to me, 'Anything you have to spend money on to make money on is deductible.' I think that is a pretty safe rule."

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5. E-filing helps.

The IRS maintains that filing returns electronically can “dramatically reduce errors,” lowering the odds of an audit.

On Jan. 24, 1986, the IRS received its first electronically filed tax return from a preparer. By 1989, taxpayers in 36 states could file their federal taxes electronically. By 1990, taxpayers throughout the country could file electronically if they expected a refund. Out of the nearly 143 million individual tax returns that the IRS received in 2010, 98.7 million were e-filed.

The error rate for a paper return is 21 percent, the IRS reported. The error rate for electronically filed returns is 0.5 percent.

Remember that audits are few and far between.

The word “audit” strikes fear in many people, but the deep audits that people tend to envision are fairly rare.

In the most common federal audits, taxpayers receive notices asking about certain details of their returns and requesting more information or clarification. This is known as a “correspondence audit.” Even those are rare, Zinman said.

“The probability of being audited is so limited, so minuscule compared to, say, the probability of getting struck by lightning,” he said, chuckling.

According to the IRS, out of the nearly 141 million individual returns that were filed for 2011, only 1.1 percent were audited.

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