The Dreaded IRS Audit – Red Flags

Being selected for an IRS audit isn’t simply a matter of chance. Certain factors can make your tax return stand out from the rest.

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To help you cut the risk of an audit, use a tax preparation service,

The IRS pays more attention to some returns than others, so it’s important to understand the factors that may elevate the likelihood that auditors take an interest in your situation.

If you’re audited, don’t be surprised if you have to make additional payments for invalid deductions or expenses. It’s easy to make mistakes, so be sure to keep all your documentation in case you get audited.

Here are eight potential red flags that could alert the IRS — and some survival tips if you come under scrutiny.

1. High incomes. According to a recent IRS report on its enforcement activity, your chance of being audited substantially increases once your income crosses $200,000.

2. Large itemized deductions. Deduct every penny you’re entitled to — but realize that if your itemized tax deductions are bigger than the IRS’ target range for people at your income level, your return may get a second look.

3. Home offices. You can only take a home office deduction if you meet all of the qualifications, including regularly and exclusively using part of your home as your principal place of business. For example, if your office doubles as the kids’ playroom, you’re generally unable to deduct it. For details, see IRS Publication 587.

4. Missing investment income. You know the IRS Form 1099 that financial services companies send you that summarizes your interest and dividends for the year? The IRS also gets that information. Make sure your return properly includes this information.

5. Incomplete returns. If your return is missing a few pieces, the IRS may wonder what else you forgot. Although you still must enter the correct information, a tax-preparation service that calculates figures you enter may help you avoid certain clerical errors that raise auditors’ eyebrows.

6. Business losses. In a tough economy, business losses are more common — but they’re still something the IRS likes to double-check. Make sure your expenses are legitimate and eligible to be deducted and that your business isn’t just a thinly disguised hobby.

7. Charitable deductions. You’ll need a canceled check or dated receipt for any cash contributions, and contributions of $250 or more require written acknowledgement from the charity. If you made a noncash contribution valued at more than $5,000, you’ll need an expert appraisal to back up your claim.

8. Medical expenses. For 2012, you can deduct these costs only to the extent they’re greater than 7.5% of your adjusted gross income, and it’s important to keep detailed records. Also remember you can’t deduct the cost of over-the-counter medicine, health club dues or most cosmetic surgeries. For 2013, the percent-of-AGI hurdle for those 64 and younger is climbing to 10%.

If you’re doubtful about the decisions you’re making when completing and filing your tax return, consider hiring a professional. Spending some money for expert guidance today could help you avoid paying increased taxes and penalties tomorrow.

An Enrolled Agent and U.S. Tax Court Practitioner, I represent taxpayers in front of the IRS and the U.S. Tax Court on self-prepared tax returns and tax returns prepared by other tax preparers. I handle CDP hearings, collection cases and contested issues in IRS audits. With more than three decades of experience working with small individual returns to large, multi-company and multinational companies returns I have a broad breadth of experience and am in the position to help you.

As an Approved Continuing Education Provider, I am available to speak to organizations throughout the United States on Tax and Tax Research issues.

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