Tax Defense: Top 5 IRS Audit Red Flags

dollar signDo you want to boost your refund without triggering a tax audit? Staying out of the IRS crosshairs is easy if you know how to avoid these common mistakes.

Report What You Earn

What happens to all of those W-2s and 1099s you receive at tax time? You may toss them aside, but the IRS is carefully adding up the numbers. If your return doesn’t match the IRS’s expectations, you could get an audit notice from your not-so-friendly local agent. Whether you file online or take your documents to a tax preparer, make sure that the numbers match. If something is wrong, ask your employer or bank for a corrected copy.

Separate Business From Pleasure

If a quarter of your paycheck goes to building squirrel huts and scratching off lotto tickets, why should you have to pay taxes on that income? Claiming large losses on Schedule C is sure to start a review, especially if your business looks more like a hobby. To have a good defense, you must show that you expect to make a profit from the activity at least two out of every five years. If you’re hanging a network of pet projects in your backyard instead of selling them on the street, forget about claiming any deduction.

Don’t Pretend to Be the Gates Foundation

We all like the idea of helping others, but fudging your charitable deduction numbers isn’t the way to do it. Remember, the IRS knows how much you make, how much you have donated in the past and how much your neighbors donate. If your charitable donations suddenly skyrocket, you’re not reducing your tax bill; you’re sending up a red flag. Keep receipts and appraisals for any donations you do make. Use the fair market value, not the purchase price, for items you give to Goodwill or the Salvation Army. That $200 breadmaker you received for Christmas may be worth only $30 at the thrift shop.

Don’t Count on a Home Office Advantage

If you work on your laptop while watching “Mad Men,” you should be able to claim the living room as a home office, right? The IRS doesn’t quite see life as you do. If you want to write off a portion of your rent and utilities, you’re going to need a dedicated space that you use only for business purposes. While home office deductions may send up a red flag, don’t be afraid to claim the deduction if you are entitled to it.

Stay Away From Zeros

Round numbers make your math easier. They look nicer. They also tell the IRS that you’re making them up. In real life, tax numbers are rarely round. You’re expected to leave off the pennies, but rounding $1,753 up to $2,000 is a no-no. Be especially careful with itemized deductions, such as medical bills, mileage and unreimbursed employee expenses.

Avoiding the IRS’s gaze has more to do with careful preparation than cunning tricks. Consult with a network of tax professionals, be ready with a defense and start imagining how you will spend your refund check.

About the author: Mary Sutton is a Senior Writer for Fertile Content and a frequent guest contributor to many blogs Google+