Tax Return Audit: What Can Flag You

A few days ago I wrote about the Risk of an IRS audit and what the IRS does when they review tax returns.

If you want to know if you are more likely to get flagged for an audit, an dto be prepared for one, then you need to know what can trigger it. Here are a few situations that can draw additional attention of the IRS to your tax return.

• Reporting income and taxes withheld on your tax return that does not agree with the information on the Forms W-2 and 1099 that you received. The IRS receives the same information and their Document Matching Program will flag these errors.
• Total income from self employment, reported on Schedule C, of $100,000 or more. According to one recent study, the IRS has concluded that individuals filing Schedule C are more likely to under-report their income and overstate their deductions.
• Claiming deductions that are unusually large in relation to your income. According to a report of IRS inquiries, the IRS selected a taxpayer's return for audit when the tax payer claimed over $18,000 in unreimbursed business expenses when he reported only $25,000 in gross income!
• Married taxpayers filing separately who both claim the same deductions. Many such taxpayers should split or allocate the deductions that are paid jointly.
• Taxpayers returns that fall into a series of industries or activities that, based on past IRS audit experience, have a higher incidence of noncompliance. This includes tax returns of auto dealers, taxi and air service operators, attorneys, gas retailers, etc.

If you are in one of these situations, don't freak out. Just make sure to prepare written records and keep solid proof of all the deductions and adjustments you claim. Also store all information, written records and copies of your tax returns in an organized file box - think of this as an audit-ready tax file that will be ready to use to defend your tax return in the event you are selected for an audit.

Check back in a few days when I'll write about a few specific tax return errors that can trigger an IRS audit and how you can avoid them.

Ray Martin

View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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