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.

---

Rental Property Tax Deductions

Own residential rental properties? This article discusses how income from... Read More

Tax Tips for Home-Based Business Owners

As tax time approaches, many home-based business owners begin completing... Read More

Tax Secrets - How Drew Miles Helped Me

How about a Tax Tip?As we all know Taxes are... Read More

Save Money on Taxes - Is the Only Way to Get Your Tax Savings is to Sleep With an IRS Agent?

Tilting the Tax Laws in Your Favor.In order to accelerate... Read More

Identity Theft ? Impacting Your Taxes?

If your identity is stolen, your finances can quickly become... Read More

Small Business Tax Deductions for Year End 2004

As a small business owner, it's wise to familiarize yourself... Read More

Know A Tax Cheat? Get Paid To Tell The IRS

According to the IRS, taxpayers underpay their taxes by some... 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

Tax Jokes and Quotes

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

Understanding Marketing Tax Deductions

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

Six Urban Myths About Taxation

Six Urban Myths ? Taxation"I am proud to be paying... Read More

IRS Statute of Limitations: Do Taxes Ever Expire?

Many Americans believe that an IRS debt is a debt... Read More

Tax Trap #1 -- Waiting to Incorporate: What A Difference A Date Can Make

NOTE: This is the first in a series of 5... Read More

Tax Trap #3 -- IRS Penalties, Interest and Love Letters

As a small business owner or self-employed person, one of... Read More

IRS Reports Tax Gap of $300 Billion

The Internal Revenue Service is reporting that the difference between... Read More

Gambling Income and Expenses - Tax Requirements

Hit a big one? With more and more gambling establishments,... Read More

Back To School ? Educators Deduct School Expenses

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

Tax Help Secret: Avoiding the Entreprenuers Curse

Your days as an entrepreneur and businessperson are consumed with... Read More

Taxing Overseas Firms for SOX Compliance

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

Taxation of Forgiven Debt: The 1099C & You

Often people fall on hard times and stop paying on... Read More

Small Business Tax Deduction - Write-Off Bad Debts

Practically every small business has receivables that it cannot obtain... Read More

How to Reduce the Estate Tax Using the A-B Revocable Living Trust

In a past article I relayed the plight of the... Read More

How to Cut Duty Cost and Increase Profit as an Importer

Import duties continue to be significant elements in the cost... Read More

10 Tax Tips to Reduce Costs and Increase Income

No one likes paying tax. Everyone understands that tax is... Read More

How Likely Are You To Be Audited?

Statistics for IndividualsUnfortunately, the IRS increased its rate of auditing... Read More

Tax Deductions - Mr. C.P.A. Can I Deduct a Pizza? You Too Can Deduct Your Fun By Using Tax Tips

Recently, I stumbled across a concept that could change your... Read More

Furnishing Evidence in E-Tax Compliance

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

Are You An Innocent Victim of These Popular Myths?

Misconceptions, misinterpretations and just plain "untruths" are floating about income... Read More

Failure To Pay Employment Taxes ? Penalties

As an employer, you must pay employment taxes if you... 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

Alas! In E-Commerce Taxland

In trying to comply with tax laws for your e-business,... Read More

About Income Taxes; Tidbits

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

IRS Offer-in-Compromise, Hype or Hope?

"Settle for Pennies on the Dollar! IRS debts settled for... Read More