Whether you’re expecting a refund or preparing to pay, there’s one possibility most taxpayers would rather not think about: an IRS audit.
An audit is a review of your tax return and supporting records to determine whether you’ve reported your income, deductions, credits, and tax liability correctly. Although the IRS audits only a portion of individual returns, it has several ways to identify returns for closer examination, including computerized screening, information matching, random selection, and examinations related to other taxpayers or transactions.
The good news? You don’t need to avoid legitimate deductions, give up complicated investments, or wait until the last minute to file your taxes to protect yourself.
The best approach is to report your income accurately, claim only the deductions you’re entitled to, and maintain documentation that supports your return.
Here’s what individuals, business owners, and real estate investors should know about reducing tax-reporting mistakes and preparing for a potential IRS audit.
1. Double-Check Your Tax Return for Errors
Tax returns contain a lot of moving parts, particularly if you have multiple income sources, dependents, investments, or a business.
Even when you’re preparing your return yourself, take time to review the details before filing.
Pay particular attention to:
- Income: Make sure you’ve accounted for relevant W-2s, Forms 1099, investment income, business income, rental income, and other taxable sources.
- Social Security numbers: Verify the identifying information for yourself, your spouse, and your dependents.
- Filing status: Confirm that your filing status reflects your circumstances and that you meet the requirements for the status you’re claiming.
- Dependents and tax credits: Make sure you qualify for the dependents, deductions, and credits you claim.
- Deductions: Check that your deductions are permitted under the applicable rules and supported by adequate records.
Tax software can help catch arithmetic errors and inconsistencies, but it can’t necessarily determine whether every expense is deductible or whether you qualify for a particular tax benefit.
For example, software might accept a home office deduction without knowing whether the space meets the IRS’s exclusive-use and regular-use requirements.
A return can be mathematically correct and still contain a tax error. Accuracy means getting both the numbers and the underlying tax treatment right.
2. Report All Required Income
The IRS receives information from employers, financial institutions, payment processors, and other sources. It can compare much of that information against what taxpayers report on their returns.
If your return doesn’t match third-party reporting, you may receive a notice asking you to explain the discrepancy or correct the return. Certain discrepancies and other circumstances can also lead to an examination.
Common areas to review include:
Freelance and business income: If you’re self-employed, make sure your records account for income received through different clients, platforms, payment methods, and business accounts.
Investment income: Review interest, dividends, stock sales, and other investment transactions. Remember that proceeds from selling an investment aren’t necessarily the same as taxable profit.
Cryptocurrency: Digital asset transactions can have tax consequences. Review your transaction history and determine which sales, exchanges, payments, or other activities need to be reported.
Rental income: Account for rent received and other relevant income from your rental properties, including amounts that may be reported through rental platforms or property managers.
Payment-app transactions: Don’t assume that every payment reported on Form 1099-K is taxable business income. Personal reimbursements and other nontaxable transactions may be included in a gross payment report. Reconcile the form against your records and report the underlying transactions correctly.
If you discover that a form is incorrect, don’t simply ignore it. Contact the issuer when appropriate and retain documentation explaining the discrepancy.
The goal isn’t to report every dollar deposited into your bank account as taxable income. It’s to identify which amounts are taxable, report them correctly, and be able to explain the difference.
3. Claim Legitimate Deductions, Not Just the Biggest Ones
Deductions are an important part of tax planning. You shouldn’t avoid claiming a deduction simply because you worry it might attract attention.
Instead, make sure you qualify for the deduction and can substantiate it.
This is particularly important for self-employed taxpayers and small-business owners filing Schedule C.
Common business deductions include qualifying expenses for advertising, supplies, insurance, professional services, business software, and other ordinary and necessary costs of operating the business.
But some deductions require additional documentation or have specific limitations.
Home Office Expenses
A home office deduction can be legitimate if you meet the applicable requirements. For many businesses, the space must be used regularly and exclusively for business.
Keep records of the office’s size, how it’s used, and the expenses included in your calculation.
Business Travel and Meals
Travel and meal deductions have specific substantiation requirements. Depending on the expense, you’ll generally need records showing the amount, date, location, and business purpose, along with other required details.
A credit-card statement alone may not establish that a meal was business-related.
Vehicle Expenses
If you deduct vehicle expenses, maintain a mileage log or other records that satisfy the applicable requirements. Document the business purpose of your trips and distinguish business mileage from personal driving and commuting.
The IRS requires supporting evidence for many business deductions, and certain expenses—particularly travel, meals, gifts, and vehicle use—have specific substantiation rules.
Don’t inflate expenses, estimate deductions without adequate support, or classify personal purchases as business costs. And don’t leave legitimate deductions unclaimed just because the rules require some recordkeeping.
4. Be Prepared to Explain Deductions That Require Extra Documentation
Some tax situations require more documentation than others. That doesn’t mean the deductions are improper; it means you should be prepared to support them.
For example, a large charitable contribution may be perfectly legitimate. Depending on the type and amount of the contribution, however, you may need receipts, written acknowledgments from the charity, records of the property donated, or a qualified appraisal.
Similarly, a business that reports substantial expenses relative to its revenue should have records explaining those expenses and showing how they relate to the business.
There is no universal rule that a deduction becomes suspicious simply because it’s large or represents a significant percentage of income.
The relevant questions are whether the deduction is legally permitted, whether you meet the eligibility requirements, and whether your records support the amount claimed.
Don’t make tax decisions based on how a deduction might look in isolation. Make them based on the law and the facts.
5. Keep Business and Personal Finances Separate
If you’re self-employed, own rental property, or operate a small business, separating business and personal finances can make your tax records substantially easier to manage.
Consider maintaining dedicated business bank accounts and credit cards, using bookkeeping software, and reconciling your accounts regularly.
For each business expense, keep enough information to establish what you purchased, how much it cost, when you purchased it, and why it was related to your business.
For rental properties, maintain separate records of rental income, operating expenses, repairs, improvements, and depreciation.
This separation helps you identify errors before filing and makes it easier to respond if the IRS requests documentation.
It also helps you understand how your business is performing. Good bookkeeping isn’t just about taxes; it’s part of making sound financial decisions.
6. Understand the Tax Rules for Rental Properties and Investments
Rental property and investment transactions can introduce tax complications that don’t appear on a straightforward W-2 return.
For rental properties, common issues include:
- Distinguishing deductible repairs from capital improvements.
- Calculating depreciation correctly.
- Applying passive activity loss limitations.
- Reporting rental income and expenses consistently.
- Maintaining accurate records of the property’s purchase price, improvements, and adjusted tax basis.
For investments, review your cost basis, sales proceeds, holding periods, and any applicable adjustments before reporting capital gains or losses.
For example, if you sell stock for $20,000 that you purchased for $12,000, the starting point for calculating your gain is generally the difference between the sale proceeds and your adjusted cost basis—not the full $20,000 in proceeds.
But the calculation may be affected by transaction costs, adjustments, and other circumstances.
If you sell real estate, receive inherited investments, participate in a partnership, or complete a like-kind exchange, the tax treatment can become considerably more complex.
Keep records from the original transaction, not just the documents you receive in the year you sell. You may need those earlier records to establish your basis and support your tax calculation.
7. Don’t Confuse an IRS Notice With an Audit
Receiving a letter from the IRS can be stressful, but not every notice means you’re being audited.
The IRS sends notices for many reasons, including discrepancies between a return and information reported by third parties, questions about a credit, requests for additional information, and proposed adjustments to your tax account.
A correspondence audit, for example, may focus on specific items and ask you to provide supporting documents by mail. Other examinations may involve meetings or a review of more extensive financial records.
If you receive a notice:
- Read it carefully. Identify the tax year, issue, requested documents, and response deadline.
- Check the information. Compare the IRS’s figures with your filed return and supporting records.
- Respond by the deadline. If you need additional time, contact the IRS using the instructions in the notice.
- Keep copies. Retain the notice, your response, and all supporting documents.
- Get professional help when needed. If the issue involves substantial amounts, complex transactions, or multiple tax years, consider having a qualified tax professional assist you.
The IRS generally initiates an audit by mail, not through an unsolicited phone call demanding immediate payment. Be cautious of callers or messages threatening arrest, demanding gift cards, or asking you to pay through unusual methods. Verify unexpected communications through official IRS channels.
Ignoring a legitimate notice won’t make the issue disappear. Responding promptly gives you a better chance to resolve it efficiently.
8. File Electronically, but Don’t Believe Every Audit Myth
Electronic filing is generally a good choice because it can reduce common processing errors and provides confirmation that the return was submitted.
However, e-filing isn’t a guarantee against an audit. The IRS uses multiple methods to select returns for examination, including computer screening, random selection, and information matching.
You may also hear that filing early—or waiting until the last possible moment—changes your chances of being audited.
There is no reliable basis for recommending that taxpayers delay filing until April simply to reduce audit risk.
Instead, file when your return is complete and accurate. If you’re waiting for a necessary tax document, resolve the issue before filing rather than submitting an incomplete return just to get ahead of the deadline.
If you need more time to file, you can generally request an extension. Remember that an extension to file generally doesn’t extend the deadline to pay any tax you owe.
The best filing date is the one that allows you to prepare an accurate return and meet your legal obligations—not one chosen to game the IRS’s audit-selection process.
9. Keep Your Tax Records After You File
Your responsibility doesn’t end when you submit your return.
You should retain the records needed to substantiate your income, deductions, credits, and other reported tax items.
The IRS generally recommends keeping tax records for as long as they may be relevant to administering the tax law. In many common situations, the standard period for assessing additional tax is three years, but longer periods can apply. For example, a substantial omission of income can extend the period, and special rules apply in certain circumstances.
Some documents should be kept longer because they affect future tax years.
Examples include:
- Records establishing the cost basis of real estate and investments.
- Depreciation schedules for business assets and rental properties.
- Records of capital improvements.
- Documents related to carryforward losses and credits.
- Retirement account records that may affect future distributions.
Digital recordkeeping can make this easier. Save receipts, invoices, statements, contracts, and other supporting documents in an organized system, with clear file names and backups.
If you own a business or rental property, retain the underlying bookkeeping records as well as the tax returns prepared from them.
10. Know When to Work With a CPA
Not every taxpayer needs professional tax preparation. A person with one W-2, no dependents, and no unusual transactions may be comfortable preparing a straightforward return using tax software.
But professional help can be particularly valuable when your finances involve multiple income sources or complicated tax rules.
Consider consulting a CPA if you:
- Own a business or work as an independent contractor.
- Have substantial rental income or multiple properties.
- Buy and sell investments or digital assets.
- Receive partnership or S corporation income.
- Claim complex deductions or tax credits.
- Have experienced a major life change, such as marriage, divorce, inheritance, or the sale of a business.
- Receive an IRS notice or audit letter.
A CPA can help you apply the relevant rules, identify deductions you qualify for, spot inconsistencies, and organize records before questions arise.
Professional preparation doesn’t guarantee that you’ll never be audited. Nor does being audited necessarily mean your return was wrong.
The goal is to file accurately, make informed decisions, and be prepared to support the positions taken on your return.
What Happens If the IRS Audits You?
Even careful taxpayers can be selected for an audit. Selection alone doesn’t mean you’ve done anything wrong.
If you’re audited, the IRS will explain which items it’s examining and what information it needs. The scope may be limited to a specific deduction or credit, or it may cover a broader range of issues.
Gather the records relevant to the examination and respond to the requests in the notice. If you disagree with a proposed adjustment, you generally have options to explain your position and, depending on the circumstances, challenge the IRS’s findings.
If you can’t locate a document, don’t fabricate one or assume the entire return is automatically invalid. Review what evidence you do have and consider getting professional guidance on how best to respond.
An audit is a process for resolving questions about a tax return. Taking it seriously, meeting deadlines, and providing organized information can help that process go more smoothly.
The Bottom Line
You can’t guarantee that the IRS will never examine your tax return. Returns can be selected through computer screening, information matching, random selection, and other methods—even when taxpayers have acted in good faith.
But you can take practical steps to reduce avoidable problems.
Report your income accurately. Claim only deductions and credits you qualify for. Maintain records that support your tax return. Keep business and personal finances organized. And seek professional guidance when your situation calls for it.
For Seattle-area individuals, business owners, and real estate investors, tax planning is about more than avoiding an audit. It’s about complying with the rules while making the most of the deductions and tax strategies available to you.