9 Warning Signs You're About to Get Audited (http://finance.yahoo.com/news/9-warning-signs-youre-audited-175810539.html)
By Kimberly Palmer | U.S.News & World Report LP – Wed, Mar 7, 2012 12:58 PM EST
The IRS is on the prowl--possibly for you. Thanks to improved detection systems and computerized checks, the IRS can more easily identify red flags that trigger audits, says Joseph Perry, a partner at Marcum LLP, a public accounting firm. "They definitely contact taxpayers more frequently," he adds.
Contact typically starts with a letter requesting more information and can lead to in-person meetings. Perry says it's usually triggered by a tax return that contains something unusual, such as an above-average deduction or change in income from previous years. As long as the taxpayer can defend his filings with the proper paperwork and logic, Perry says he has nothing to worry about--other than the time it takes to respond.
Before you start looking anxiously at the mailbox, wondering if the IRS will be mailing you a letter, consider whether any of these nine signs that you're about to get audited apply:
1. You made a lot less money last year. Perry says the IRS looks out for any major changes in income, which can signify that a taxpayer is under-reporting his earnings. Since the IRS tracks historic data, people who suddenly start reporting much less income can be flagged for an audit.
2. You lose or forget to file a form. Since employers send copies of all 1099 forms and W-2 forms to the IRS as well as to you, if you lose your version or forget to file it with your taxes, the IRS can flag your return for review. If you receive a form that looks like it has an incorrect amount or inaccurate information on it, Perry suggests talking to your employer before filing your taxes. You want to make sure the information you provide to the IRS matches up with any other information they are receiving about you.
3. You work for yourself. It might not seem fair, but being self-employed can raise red flags for the IRS, especially if you claim your home office and other costs as business expenses but don't earn much income. "The IRS questions those type of businesses," says Perry. His advice is to keep careful track of all paperwork so you can defend any deductions and credits you take.
4. You claim losses from a hobby. While writing off business expenses can be legitimate, it's illegal to pretend a hobby is a business and then write off the related expenses. For example, if you enjoy woodworking, you might practice the craft on the weekends for fun. Doing so does not enable you to write off the cost of wood and tools. (If you were selling those creations online, that would be a different story.) The difference between a small business and a hobby, says Perry, is that a business "must be entered into and conducted with the reasonable expectation of making a profit."
5. Deducing home office (or car) expenses. While plenty of people can legitimately claim home office expenses on their taxes, some people do so incorrectly. Merely checking email from home after work, for example, does not justify a home office deduction, says Perry. In order to qualify, the home office must be used for work only. Likewise, claiming a car as a business expense can also raise red flags; Perry urges taxpayers doing this to keep careful track of how much they use the car for business versus personal use.
6. You included expensive meals and entertainment costs among your deductions. The IRS often double-checks these types of claims to make sure they are legitimate business expenses, says Perry.
7. You were particularly generous this year. Perry says the IRS is on the lookout for people who inflate their charitable donations, and that the agency takes a close look at taxpayers who say they donated $500 or just under, since anyone who donates more than that amount must file form 8283. (And if you do donate more than $500, be sure to file that form.)
8. You maintain an overseas bank account. The IRS has added more reporting requirements this year for people with money in foreign accounts. Failing to report one could trigger an audit.
9. Your numbers don't match. If numbers on various forms don't match or add up correctly, the IRS is likely to notice and look into any disparities. So treat your taxes like a final exam in algebra and check over all the numbers before submitting.
As long as you know you filed your paperwork properly, you can sit back and enjoy any refunds coming your way.
