6 Audit Red Flags to Avoid the IRS

When I think about experiences that I would want to avoid the most a few thoughts come to mind.

Being caught in the middle of a tornado. Being attacked by a grizzly bear. And being audited by the IRS. (Sorry IRS. I know you're probably not that bad, but for now I would like to keep you at arms distance. )

Luckily, I have a good CPA that keeps me in check so *fingers crossed* we'll never get audited.

I read a surprising statistic that only 1.6 million taxpayers were actually audited last year. That's just 1% of tax filers who are earning less than $200,000. The same report showed that no more than 12% of millionaires had their filings checked out either.

So why am I freaking out? Well, for starters, I am considered to be self-employed.

From a business standpoint, that's a great thing!  From a 'potential to be audited' standpoint, not so much.

Needless to say, I have this cold-chilling feeling that it's only a matter of time.

Should you worry about being audited?  To hopefully prevent the unwanted call, here are 6 audit red flags to avoid.

1. Get Your Schedule C in Check.

Schedule Cs get a close look annually as the IRS seeks to remedy the tax gap (the difference between federal taxes owed and federal taxes paid). As Schedule Cs are often filled out by solopreneurs and small business owners themselves, the chances increase for claiming substantial deductions that may be hard to substantiate.

2. Don't Make a Million Dollars.

Millionaires work with accountants for a reason ' generally speaking, returns prepared by tax professionals raise far fewer red flags than DIY ones. If you will make around $1 million this year, look back at the first paragraph of this article and consider whether or not it might be wise to defer some potentially taxable income into 2013.

3. Double Check Your Math

Calculators are readily available and they can be as crucial as software when it comes to filing your federal return. The IRS does spot mediocre mathematics in returns. It has even recalculated taxes to save people money in years when special tax credits were available, such as the Making Work Pay credit.

However, it also finds unreported and underreported taxable income through the same scrutiny. In fact, the IRS found 4.2 million math errors last year on tax returns for 2010.

4. Take Too Many Tax Deductions

Is your money-losing small business venture truthfully just a hobby? Did you really donate $4,000 worth of office supplies to a charity, and do you have the receipts to back that up? The IRS routinely checks returns for deductions that seem outlandish.

My CPA suggested that if you donate a lot to charities such as Goodwill, you can't do too much to keep records.  Keep receipts from your donations as well as taking pictures of what you donate will fully support your case.

5. Living it Up

Does the IRS peruse social media? Yes it does, just as many people do. The IRS has done good detective work for years; its investigators know to check out DMV and employment records to get a better picture of an errant taxpayer.

Today, photos and posts on Facebook and MySpace and Twitter can telegraph potentially valuable nuggets of information, particularly about young taxpayers who have come into wealth that their returns don't seem to show.

6. Know Your Tax Situation and Don't Procrastinate

A staggering number of Americans pay little to no attention to their federal taxes. According to the 2012 Taxes and Savings Survey from Capital One Bank, 11% of American taxpayers choose to file at the last minute. For that matter, about 5% of Americans (that's 7 million people) don't file federal returns at all ' and in some cases, it isn't just because they don't earn enough taxable income.

P.S.: you or someone you know might be eligible for some money. The IRS has more than $1 billion in unclaimed refunds just waiting for U.S. taxpayers who didn't send in federal tax returns for the year 2008. The IRS estimates that the median such refund is $637. Are you or someone you know eligible? Visit this webpage for more information.

If you are eligible, you must file a 2008 federal return (and put it in the mail) ASAP ' the deadline is Tuesday, April 17, 2012.

Tagged as: audit red flags, tax filing