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Tuesday's Tax Tips: How to Avoid an Audit

Posted by Gayle Kesten Tuesday, Apr 1, 2008, 09:22 AM ET

You think you're swamped? Try stepping into the shoes of the IRS, which processes millions of corporate and personal tax returns every year.

The good news: Given such a massive volume of returns, only a tiny percentage -- 1 to 2 percent -- wind up in the government's audit bin (based on your DIF score, which rates the probability of inaccurate information on your return). So as long as you're aware of the red flags that could send Uncle Sam's little elves knocking on your door, chances are you'll be OK.

From the Los Angeles Times' Personal Finance column, some audit triggers include:

  • Unusually high deductions: Deductions that stray from a normal range (as determined by the IRS' "Statistics of Income" book) will cause your return to get further scrutiny. That said, even if all of your deductions match national averages, if the total exceeds your annual salary, danger, Will Robinson.

  • High income: The more you earn, the more likely you could be audited. Keep in mind those likelihood percentages are still rather small -- 0.93 percent if you make less than $100K per year, 1.77 percent if you make between $100K and $200K, 2.87 percent if you make more than $200K ... you get the idea.

  • Cash businesses: The IRS is apt to look more closely at your gross income if you run the type of business that lends itself to cash transactions. A telltale sign: You deposit more in your bank or brokerage accounts each year than you report as earnings on your tax return.

  • Self-employment: Of course you should write-off every single one of your legitimate deductions, but the more aggressive you are, as some self-employed people working out of home offices tend to be, the more likely you are to raise a few IRS eyebrows.

  • Errors: We all make mistakes, but doing so on your tax return means you could have some 'splainin' to do.

    Another trigger: high donations to charity. The average donation is around 2 percent of a person's income, according to a CPA interviewed by CNNMoney. Also, if you're donating property worth more than $5K, you have to have it appraised. Keep in mind, a new tax rule mandates written documentation for even the smallest of donations.

    Previous Tuesday's Tax Tips:

  • Medical Deductions
  • When In Rome...
  • Side-By-Side Look at the Top 10 Online Tax Software Products
  • Deducting Your Home Office
  • Overlooked Deductions

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