5 Moves That Flag You For An IRS Audit

Tax time is upon us, but before you file, we have a few tips to keep in mind so you don't become a target for an IRS audit. High-income taxpayers tend to raise some of the biggest red flags for things such as offshore credit-card use and investments in risky schemes or promotions. But certified public accountants say there are some surprising circumstances this year that could bring the tax man to your door:

 

Homebuyer Tax Credit

A record number of households deducted the $8,000 first-time homebuyer tax credit in 2010. The credit was designed to encourage home sales in the down real estate market.  The IRS plans to examine every single one of those households, accountants say. So if you claimed this credit, be sure to attach a copy of your settlement to your tax return.

 

 

Charitable Donations021

Did you claim a big charitable deduction in 2010?  Audit warning bells ring if you claim most of your income as a charitable donation. The IRS uses a formula to predict how much you can afford to donate, so hold on to every receipt for every donation.  "You've got to support whatever you put on your tax returns, especially in the case of deductions," said CPA Alfred E. Stacey. "You want to be sure you can support them. You want to be sure you have the information. A lot of people leave money on the table because they don't have a summary of all their charitable contributions. You want to be able to prove it should you ever get examined."

 

 

Making More Than $100,000

The IRS has said it focuses its limited resources on those with higher household income, so if you fall into this category, you're automatically a red flag for a potential audit. That means it's even more important to keep adequate records to substantiate your deductions, according to MSN Money.

Accountants also say there are benefits to income allocation, which means viewing your family as a single economic unit, regardless of who actually generated the income. The law allows you to allocate income from a higher-bracketed family member to a lower-bracketed one -- like a spouse or child -- in order to save tax dollars.

 

 

Fudging Your Business Expenses

If you're claiming something as a business expense, it had better be one, and you need to have receipts to back that up. Experts warn against schemes that involve claiming personal expenses as business ones, according to MSN Money.  Expenses for auto, travel, meals and entertainment have traditionally been the areas most audited, accountants say. It's important to keep records of car mileage and establish at what percentage you use your vehicle for work.  Also, you must have a receipt for all meals and entertainment of $75 or more that you plan to deduct as business expenses. You should also be able to note who you entertained and what your business relationship is.

 

 

Getting Paid In Cash

Workers who get paid in cash definitely raise the red flag for the IRS, and the agency has a specific program to investigate people with certain occupations. Waiters, those who work in the gaming industry and even doctors can become audit targets, according to MSN Money.  The more cash you make, the more likely it is that the IRS can find additional tax revenue by auditing you. The self-employed are also easy targets for auditors. Again, the best way to help avoid an audit is to document and substantiate everything.