Tax Audits: What Signs Make You More Likely to be Audited by the IRS?

It's a major fear for most Americans: A notice from the Internal Revenue Service (IRS) summoning you for an audit.

What is it about these three letters that strikes a cord of fear in Americans' hearts? Learning the signs that could put your tax return at the top of the list for an audit, and avoiding them if possible, may put your mind at ease.

Statistically speaking, your chances of actually being audited aren't that high-according to IRS data, one in 150 individual taxpayers were audited in 2003. This number had gone down in recent years-about one of every 79 tax returns was audited in 1998-but then, in 2004, individual taxpayer audits exceeded 1 million for the first time since 1999.

Also in 2004, the IRS gathered a record $43.1 billion in enforcement revenue, a 15 percent increase from 2003. Now in 2005, the IRS plans to add more enforcement to their team, meaning that more tax audits could potentially be performed.

What adds to most people's fear of being audited is that of the unknown: Very few people know just how the IRS chooses which tax returns to audit.

"That's a very closely guarded secret that not many people in the IRS know," said Bernard S. Kent, a partner with the human resource services group at PriceWaterhouseCoopers.

Still, there are some signs that will put your tax return at the top of the "to audit" pile. So take notice of -- and by all means avoid if they're not legitimate -- these red flags that increase your chances of catching the tax examiner's eye.

A computer program called the Discriminant Index Function, or DIF, is the first way your tax return could be marked for an audit. It looks most closely at the following items:

* Higher incomes: If your income is more than $100,000, your chances of being audited increase to one in 20. Says Eric Tyson, co-author of "Taxes 2005 for Dummies," "Higher income earners are more likely to be audited because there is more tax money at stake."

* High incomes compared to the previous year

* Unreported income (investment returns, etc.)

* Income other than basic wages (contract payments, etc.)

* Home-based business: Particular attention is given to returns that claim home businesses in addition to a salary income or excessively high deductions that don't match with the business (for instance, expensive business meals for a virtual administrative assistant.) You should also be careful with how you define your home office. "The room has to be used exclusively for business purposes," said Kent. "You cannot just have a desk in your living room where you have a television set."

* Large business meal and entertainment deductions or excessive business auto use

* Low income with large business deductions: Did you report earning $40,000 and write off a $50,000 car for business? Chances are a tax examiner will find your return warrants a closer look.

* Non-Cash Charitable Deductions

* Hobby Losses: Filing a Schedule C to report income or loss from a sole proprietorship that is not really a business but a hobby is one of the highest risk moves you can make.

* Offshore credit cards

* Large casualty losses: The rules for claiming a casualty loss are very specific, so be sure your loss qualifies before claiming it.

* Having several dependents.

Tax returns that claim the earned income tax credit-a break for those with low-incomes-are also scrutinized more closely by the IRS. That's because its requirements are complex and many honest mistakes are made by those who think they qualify, along with those who intentionally try to increase the credit's payout.

If You Have Legit Deductions, Take Them

This isn't to say that you should be afraid to make honest deductions on your tax return or shy away from credits for which you qualify in order to avoid the IRS. According to Robert G. Nath, author of "The Unofficial Guide to Dealing with the IRS," As long as your deductions and expenses are legitimate and you have documentation, they will be allowed."

In fact, most Americans overpay on their taxes, which is why we highly recommend reading Lower Your Taxes - Big Time: Wealth-Building, Tax-Reduction Secrets from an IRS Insider as soon as possible in 2005 (or you will likely end up paying the government hundreds or even thousands of dollars in taxes that should have been yours to keep.)

Written by a former IRS tax attorney and senior tax law specialist, Sandy Botkin, CPA, Esq., Lower Your Taxes - Big Time is one of the smartest under-twenty-dollar investments anyone could possibly make.

And in the event that you get the dreaded IRS letter in the mail that your tax return is being audited-don't despair. "Just because you get a correspondence audit letter, there's no need to panic," says Nath. "In fact, if you get a letter instead of a call, that indicates the IRS views the inquiry as not particularly earth shattering."

For more money-saving tips in 2005, don't miss these past SixWise.com articles:

* Top 10 Ways NOT to Throw Your Money Away in 2005

* Stop Overpaying the Government Thousands of Dollars for Good

From the FREE SixWise.com e-newsletter, the Web's #1 most read newsletter with original articles in all 6 areas of life leading to complete wellness.

---

Send Your Kids To Summer Camp and Write It Off

If you paid someone to care for a child so... Read More

Business Tax Deductions

As we enter mid-March, taxpayers begin to become very interested... Read More

Military Reservists, Enlistees May Get Deferral of Back Taxes

Reservists called to active duty and enlistees in the armed... Read More

Paying Workers ? What Can You Write-Off?

As your business grows, you are going to need help.... Read More

Tax Trap #4 -- The Quagmire of Depreciation

If you are a Small Business Owner or Self-Employed Person,... Read More

Donating Cars To Charity - New Tax Rules

On June 3, 2005, the IRS released guidance on charitable... Read More

Taxing Overseas Firms for SOX Compliance

The Sarbanes-Oxley Act, also called the Public Company Accounting Reform... Read More

How To Set Up A Tax-Saving Bookkeeping System

One of the most important, but least understood or appreciated... Read More

The Implications of Income Tax Charge on Estate Planning

OverviewIn the Pre-Budget Report of December 2003 the Chancellor Gordon... Read More

Furnishing Evidence in E-Tax Compliance

Self-assessment relies on taxpayers voluntarily meeting their tax obligations. This... Read More

Correspondence From The IRS ? Yikes!

It's a moment every person dreads. You pick up the... Read More

10 Thoughts on Tax Offer in Compromise

Beware of advertisements that claim to settle tax debts for... Read More

Need a Copy of Your Tax Return Information?

Taxpayers have two easy and convenient options for getting copies... Read More

Complaince of Tax Return in Electronic Commerce Taxation

Emerging Legal issues of Tax compliance of e-business Self-assessment system... Read More

Tax Jokes and Quotes

Do you realize that some tax forms ask you to... Read More

Back To School ? Educators Deduct School Expenses

As teachers and students head back to school following a... Read More

Tax Tips to Save Money on Taxes - Get the Corporate Kick and Save Loads of Money

Why a Corporation Helps Save You TaxesThe Tax Rates (Notice... Read More

Tips and Simple Guidelines on How to Calculate Payroll Taxes

Managing a business small, medium or big requires you to... Read More

Home Based Business Tax Deductions

Running a home based business reaps many wonderful tax deductions... Read More

2005 Ford Escape Hybrid Certified For Clean-Fuel Deduction

If you are environmentally conscious and purchase a 2005 Ford... Read More

Organizing Your Taxes

Does this scene sound familiar? It's April 7. You haven't... Read More

Your IRS Tax Appeal Rights

Are you in the middle of a disagreement with the... Read More

The Annual Gift Tax Exclusion: Getting The Edge

Whether helping the kids with a down payment on their... Read More

Another Tax Loophole

Just image, you are a small manufacturing company, business has... Read More

Deducting Points On Home Refinances

Deduction of Refinance PointsAny points that you pay in the... Read More

State Tax Information

All states also have their own tax system. Typically there... Read More

About Income Taxes; Tidbits

1812The first attempt to impose an income tax on America... Read More

Access to E-records by Taxing Authorities: A Case for Pakistan (Part II)

All tax authorities to e-commerce transactions should investigate the record... Read More

SFR Substitute for Returns: IRS Action on Non-Filers

In the latest Star Wars episode, the evil empire executes... Read More

Tax Reform, My Way

We need real tax reform and we need it now.... Read More

Keeping Your Own Money ? NOT Handing It Over To The Taxman

Most people trying to make a crust online (or offline... Read More

Tax Deduction for Alimony Payments? - Yes!

Over 50% of marriages end in divorce in the United... Read More

Understanding Marketing Tax Deductions

Marketing is a necessary expense in running practically any business... Read More