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Money Matters: Audit Red Flags

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The tax filing deadline is less than two weeks away.

That means if you owe uncle sam you're spending your nights with pencil and calculator or visiting a tax professional. The last thing you want is an IRS audit letter. Now the IRS only audited 1.1% of all tax returns filed in 2010.
Still there are things you can do reduce your chances of being audited.

Andrea Coombes of MarketWatch on yahoo.com finance has some tax audit red flags to avoid. Here are some of them.

1. Rental Losses

If you show income from your job or business and claim rental property losses, be wary. The IRS rules limit deducting those losses in the current year, unless you prove you're actively involved in managing the property.

2. Over-the-top Deductions

Taxpayers who claim large deductions attract attention. Anything that is significantly above what a person in your income bracket might deduct will likely be checked out. Someone making a salary of $60,000 but claiming $30,000 mortage intrest better have good records to back it up.

3. Business or Hobby?

The IRS may decide your business is really a hobby, especially if you have other income sources.

4. Business use of a car

Some taxpayers insist 100% of their driving is related to business. If so, you had better keep accurate mileage and fuel records along with business destinations. If the vehicle is used for personal or family, you can't deduct 100% of your costs.

5. Home-office deduction

You may be able to claim a deduction for expenses related to your home office, such as home insurance and utilities but be prepared for the IRS's attention. Claiming a section of a room is possible but is it worth it?

6. Earned income tax credit

You may be entitled to it, but the IRS looks at this carefully because a lot of scammers try to claim a non existent dependent. Stick to the truth and you'll be fine.

Now for the disclaimer. I'm not a tax professional. These are tips from Andrea Coombes of Market Watch. Your situation may be different so consult your own tax adviser.

For more information, check out the link below.


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