Worried about an audit? No need, if you do this

Tax audit 1040
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IRS audits may no longer be quite the nightmare taxpayers expect.

According to recently released data, the Internal Revenue Service audited just 0.86 percent of all individual tax returns last year—its lowest rate in a decade. Your odds could be even better this year as the IRS faces new budget cuts.

"The math is pretty simple," IRS Commissioner John A. Koskinen said in a speech last month before the New York State Bar Association. "There are fewer audits because we have fewer auditors." Cuts have contributed to a decline of more than 2,200 revenue agents since 2010, he said.

Reduced risk or not, the IRS did still audit some 1.1 million returns last year from taxpayers making less than $200,000, and 34,000 others from those earning $1 million or more.

The best way to limit your chances of being among them is to avoid common mistakes on your return that raise red flags. For example, missing income from a 1099, or mistakenly typing in $5,100 when you meant to report $1,500 (or vice versa). "What people should be focused on is just filing a complete and accurate return," said Terry Durkin, president-elect of the National Association of Enrolled Agents, an industry group for tax practitioners authorized to represent taxpayers before the IRS. "By doing that, there's no need to worry."

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If you do get audited, odds are good you'll be dealing with the IRS on paper rather than with a face-to-face meeting, said Barbara Weltman, a tax and business attorney based in Vero Beach, Florida.

"You have to make the distinction," she said. "There are audits, and then there are audits." So-called correspondence audits conducted by mail are the most common kind, accounting for almost three-quarters of audits last year. "You get a letter in the mail, and the IRS asks a question," she said. You either agree and send a check, or provide evidence to the contrary.

Audits that put you face-to-face with the IRS are expensive for the agency, and so are typically reserved for cases where significant problems are suspected, she said.

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Regardless of the audit type, your best defense is good records. Don't put anything on your return you can't substantiate with receipts and other documentation, said former IRS tax attorney Garrett Gregory, co-founder of Gregory Law Group in Addison, Texas. Be especially diligent if you run a home business or have claimed a refundable credit because they can increase your audit risk.

Save everything in a safe place. Keep in mind that an audit for tax year 2013 might not happen until 2016, he said.

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Should an audit notice arrive in the mail, don't panic—or assume that's the final word, said Durkin, who is also the owner of Durkin Associates in Burlington, Massachusetts. "The IRS does make mistakes," she said. The IRS recently told one client he owed $11,000, but upon investigation and after a few phone calls, the bill was less than $200. The hiccup? The government hadn't factored in tax payments the client already made, said Durkin. Respond to IRS communications quickly to avoid a pileup of penalties, but do due diligence before paying the bill.

It can help to call in aid from your preparer, an enrolled agent or other tax expert. "One of the trends we're seeing is more correspondence audits for more substantive tax issues," said former IRS tax attorney Deborah Gregory, co-founder of Gregory Law Group. Correspondence auditors can often be difficult to reach by phone, she said, and enlisting help can make a long fight easier.