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Top 5 red flags for IRS income tax audits

Tax day is just a week away, and many Minnesotans are scrambling to get their income tax returns prepared and filed in advance of the April 15 deadline. Like most people, their goal is to minimize the amount of taxes they have to pay - or, even better, to get a substantial income tax refund.

It is impossible to overstate the need to be completely accurate when filing an income tax return. While it can be tempting to "guesstimate," or even fudge your numbers a little bit, this could end up having very negative consequences if the IRS notices the inaccuracies and conducts an audit.

Some taxpayers are at greater risk of being subjected to an audit than others. Some of the most common triggers for an IRS tax audit including the following:

  • High incomes: High income taxpayers are more likely to be audited than working-class people are. This is because wealthy individuals tend to have more complex tax returns, and because there is more money at stake.
  • Not reporting income: The IRS will match your tax return against the W-2s, 1099s and other income statements that were reported to the IRS on your behalf. If these statements don't match, an audit may be on the horizon.
  • Home office deductions: The home office deduction is one of the most commonly misunderstood tax breaks. You can claim part of your home for business use, but only if you use exclusively for business purposes for most of the year. Most people can't claim a home office deduction if their employer also provides a space to work.
  • Big donations: Believe it or not, the IRS has a pretty good picture of what the typical charitable donations are for a person at a certain income level. If yours appears too high, the IRS may conduct an audit to determine the real amount. If you plan on claiming charitable donations, make sure you have the records to back it up.
  • Cash businesses: If you run a small business, your income tax return will be more complicated. If most of your customers pay in cash, the complication grows even bigger. The IRS will compare your stated business income to your lifestyle and the health of the economy. If it seems like you should have made more, the IRS might audit you.

If you do get audited, it is important to take the IRS's inquiry seriously. An audit can have significant financial consequences, and you are more at risk of running into trouble if you try to go at it alone. Your chances of success are better if you enlist the help of an experienced tax attorney who knows how to navigate the audit process.

Source: Consumer Reports, "Tax return red flags that may result in an audit," Mark Huffman, April 4, 2013.

To learn more about defending against an IRS audit, please visit our tax audits website.

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