7 Ways to Fight a Tax Audit

As we enter a new filing season, the risk of an audit could be higher, as the IRS moves to whittle down an annual "tax gap" estimated at $345 billion — the difference between what taxpayers theoretically should pay and what they actually do.

There is no way to absolutely guarantee 100 percent that you won't be audited. But as you prepare your 2011 return, consider these seven proactive protectors to reduce your risk of drawing IRS attention and to clear things up quickly if you do.

1. Avoid round numbers. A tax return with lots of round numbers — $1,200 in travel expenses or $1,500 in charitable contributions — "suggests that you're just estimating those claims, and the IRS loves to go after people who don't keep good records," says tax attorney Frederick W. Daily, author of five tax-related books, including Stand Up to the IRS. "You don't need to include cents, but use the closest accurate dollar amounts, such as $1,260 or $1,525."

2. Explain on paper what you can't with e-filing. Do-it-yourself tax preparation software makes for easier and more accurate tax return preparation. But you can get into trouble if you file electronically with software that has no capability to include disclosure statements. You should include these "whenever there's something unusual in your return," says Rosenberg, who is an accountant and an "enrolled agent," a person authorized to represent taxpayers before the IRS.

If you use one of these programs, she suggests not using its e-filing feature if there's anything that might leave an IRS officer wondering. "Print out your return and attach an explanation statement and mail it in."

In many cases, a type-written note will suffice to explain such red-flag issues as losses for a small business (that dang lousy economy), a high mortgage interest deduction compared with declared income (you were downsized and are paying your mortgage from savings) or a home office deduction for a regular W2 employee (ideally, that will be a letter or policy statement from your employer).

3. Double-check your math. It's no surprise that sloppy arithmetic on a paper return can flag an audit. But what are the prime math errors? "People list correct numbers but on the wrong line," says Rosenberg. So make sure sums are not only correct but in the correct place.

4. Mind each line. Don't forget the easy stuff — your Social Security number, address and signature. "It's a myth that if you fail to sign your return, you will automatically be audited," she adds. "The IRS will simply send it back for your signature. But if you repeatedly forget to sign and the IRS believes this is a deliberate pattern, you could face fraud penalties, and unwanted attention on your future returns."

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