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

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

What is it about these three letters that work stoppages a cord of fearfulness in Americans' hearts? Learning the marks that could set your tax tax return at the top of the listing for an audit, and avoiding them if possible, may set your head at ease.

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

Also in 2004, the Internal Revenue Service gathered a record $43.1 billion in enforcement revenue, a 15 percent addition from 2003. Now in 2005, the Internal Revenue Service bes after to add more than than enforcement to their team, meaning that more tax audited accounts could potentially be performed.

What adds to most people's fearfulness of being audited is that of the unknown: Very few people cognize just how the Internal Revenue Service takes which tax tax returns to audit.

"That's a very closely guarded secret that not many people in the Internal Revenue Service know," said Claude Bernard S. Kent, a spouse with the human resource services grouping at PriceWaterhouseCoopers.

Still, there are some marks that volition set your tax tax return at the top of the "to audit" pile. So tax return notice of -- and by all agency avoid if they're not legitimate -- these reddish flags that addition your opportunities of catching the tax examiner's eye.

A computing machine programme called the Discriminant Index Function, or DIF, is the first manner 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 than $100,000, your opportunities of being audited addition to one in 20. Says Eric Tyson, co-author of "Taxes 2005 for Dummies," "Higher income earners are more than than likely to be audited because there is more tax money at stake."

* High incomes compared to the former year

* Unreported income (investment returns, etc.)

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

* Home-based business: Particular attention is given to tax tax returns that claim home businesses in improver to a wage income or excessively high tax deductions that don't fit with the business (for instance, expensive business repasts for a practical administrative assistant.) You should also be careful with how you define your home office. "The room have to be used exclusively for business purposes," said Kent. "You cannot just have got got a desk in your life room where you have a telecasting set."

* Large business repast and amusement tax tax deductions or excessive business auto use

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

* Non-Cash Charitable Deductions

* Avocation Losses: Filing a Agenda Degree Centigrade to report income or loss from a exclusive proprietary that is not really a business but a avocation is one of the highest hazard moves you can make.

* Offshore credit cards

* Large casualty losses: The regulations for claiming a casualty loss are very specific, so be certain your loss measure ups before claiming it.

* Having respective dependents.

Tax tax returns that claim the earned income tax credit-a interruption for those with low-incomes-are also scrutinized more than closely by the IRS. That's because its demands are complex and many honorable errors are made by those who believe they qualify, along with those who intentionally seek to increase the credit's payout.

If You Have Legit Deductions, Take Them

This isn't to state that you should be afraid to do honorable tax deductions on your tax tax return or diffident away from credits for which you measure up in order to avoid the IRS. According to Henry Martin Robert G. Nath, writer of "The Unofficial Usher to Dealing with the IRS," As long as your tax deductions and disbursals are legitimate and you have got got documentation, they will be allowed."

In fact, most Americans overpay on their taxes, which is why we highly urge reading Lower Your Taxes - Big Time: Wealth-Building, Tax-Reduction Secrets from an Internal Revenue Service Insider as soon as possible in 2005 (or you will likely stop up paying the authorities 100s or even thousands of dollars in taxes that should have been yours to keep.)

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

And in the event that you get the awful Internal Revenue Service missive in the mail that your tax tax return is being audited-don't despair. "Just because you get a correspondence audited account letter, there's no need to panic," states Nath. "In fact, if you get a missive instead of a call, that bespeaks the Internal Revenue Service positions the enquiry as not particularly Earth shattering."

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

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

* Stop Overpaying the Government Thousands of Dollars for Good